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Payment Terms
Payment Terms
A payment arrangement in which an exporter instructs a bank to hand over shipping and title documents to the importer. International Terms Of Payment: Cash In Advance; Letter Of Credit; Cash Against Documents (CAD); Performance Bond; POP - Proof of Product. Terms Of Foreign Trade: RWA - Ready, Willing and Able; SOFT PROBE; SWIFT.
International wire transfers are done via the SWIFT network, and this network offers the payer three different expense regulation methods, which are called OUR, SHA and BEN.
- OUR (sender pays costs) means: All fees will be charged to the sender of the transfer and the receiver gets the full amount submitted by the sender. These fees include the charges levied by the sending bank and any charges applied by intermediary (correspondent) banks.
Usually, the sending bank will levy a flat fee for third-party charges and the senders will know the cost before they transfer the money. (Normally, the receiving bank does not charge fees; you can find more information in the terms of your bank.) In practice it can still happen from time to time that some intermediary bank charges a fee and deducts it from the amount transferred. Unfortunately, the overall process is non-transparent and it is hard to figure out who charged these fees and when this happens (or even get this unpermitted deduction back), but it seems advisable to provide as detailed information for the transfer as possible (e.g. also your intermediary bank details) to reduce this risk.
- SHA (shared costs) means that charges are split between sender and beneficiary. The sender's bank will charge the sender a fee for the payment orders, while the beneficiary pays the charges of any intermediary bank (and those of his / her own bank, if there are any). The intermediary bank fees are deducted from the amount transferred.
- BEN (beneficiary pays costs) means that the sender does not pay any charges. Any intermediary banks and the sender’s bank deduct their charges directly from the amount being transferred. This means that the recipient will receive an amount that is lessened by the fees applied by all parties involved. The sender should therefore add the amount of these fees to the original transfer sum so that the recipient will receive the full payment. As a rule of thumb the fees of international transfers are around 25 - 35 Euro/USD. In this case, you can say that for fees below 500 Euro, receiving payments via PayPal or Credit Card is usually cheaper than via bank transfer.
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BCL - Bank Confirmation Letter. Also known as a Bank Capability Letter, or Bank Confirmation Letter, this is a letter from the Buyer's bank confirming his ability to meet a certain level payment requirements. This letter states that the Buyer has sufficient funds to cover the cost of the order. It should however be understood that this does not imply any guarantee of payment.
BCL from Buyers' bank
Bank Name: Bank Address: Bank Confirmation Letter (BCL) Dated:
Dear Sirs,
This is to confirm our mutual client (company name) maintain a banking account with us.
At their instructions we, (bank name) with full authority and mandate hereby confirm that the said client are willing and financially able to initiate this process of goods of 000.000 metric tons (Litre, Cans, Bags etc.).
We understand payment is to by (please use correct one)
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Payment Terms Of Foreing Trade. International Terms Of Payment.
Cash Against Documents (CAD)
A payment arrangement in which an exporter instructs a bank to hand over shipping and title documents (see document of title) to the importer when the importer fully pays the accompanying bill of exchange or draft. Also called documents against payment.
Disadvantage:
1. Shipment in trust by seller and no guaranty for payment from buyer side.
2. Documents in trust in buyer’s bank.
3. Buyer will pay when buyer need documents for customs clearance (based on previous experience)
PB - Performance Bond
This is a type of bank guarantee which is issued from the Seller to the Buyer. It guarantees that the Seller will meet the terms of the contract. Normally issued in the amount of 2 % of the total amount of the contract, a performance bond can be drawn upon by the Buyer in the event that the Seller breaks the contract and fails to provide the product which was stipulated in the contract.
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Letter of Credit (L/C).
In simple terms, a letter of credit is an undertaking by a bank to make a payment to a named beneficiary within a specified time, against the presentation of documents which comply strictly with the terms of the letter of credit.
Its main advantage is providing security to both exporter and the importer, but the security offered, however, comes at a price and must be weighed against the additional costs resulting from bank charges. The exporter must understand the conditional nature of the letter of credit and the fact that payment will not be made unless the terms of the credit are met precisely.
A letter of credit is opened by an importer (applicant), to ensure that the documentation requested reflects and proves that the seller has performed under the requirements of the underlying sales contract, by the exporter by making them conditions of the letter of credit (N.B. The sales contract is not an inherent part of the Letter of Credit, although the Letter of Credit may contain a reference to such contract). For the exporter a letter of credit, apart from cash in advance, is the most secure method of payment in international trade as long as the terms of the credit are met.
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Performance Bond No. ref. To (Full name and address)
Dear Sirs,
You have concluded on /date _ contract No with Messrs _ (company name) for the purchase of: (A brief description of the contract details is Following- quantity, price, shipment, quality specs… ) As security for the due performance of the contract (_)an indemnity by a bank shall be furnished.
At the request of (company name) we, herewith irrevocably undertaken to pay you on first demand, irrespective of the validity and the legal effects of the above mentioned contract and waiving all rights of objection and defense arising therefrom, the amount of the 5% of the total contract value of usdollars .. (in words dollars) upon receipt of your duly signed request for payment stating that Messrs , have failed to fulfil their contractual obligations.
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Exemple of SWIFT payment. Buyer: (SWIFT 700) – AGAINST BG Seller: (SWIFT 760) - MAJOR WORLD BANK -103%
Contract procedures
1. Buyer sends ICPO
2. Buyer signs NCND and IMFPA
3. Seller issues full corporate offer (FCO) and buyer returns one copy of FCO duly countersigned signifying acceptance of all terms and conditions herein stated
4. Seller sends the draft contract to the buyer
5. Buyer sends contract duly signed, stamped and sealed to seller in electronic format
6. Seller returns contract to the buyer duly signed, and sealed in electronic format
7. Buyer sends a letter (addendum 4) about readiness to issuance the first payment by swift mt700 with a draft of swift mt700 (addendum 1) coordinated by buyer’s bank and contract duly signed and sealed by courier to the seller
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UCP 600
UCP 600 are the latest revision of the Uniform Customs and Practice that govern the operation of letters of credit.
UCP 600 comes into effect on 01 July 2007
The 39 articles of UCP 600 are a comprehensive and practical working aid to bankers, lawyers, importers, and exporters, transport executives, educators, and everyone involved in letter of credit transactions worldwide.
ICC Uniform Customs and Practice for Documentary Credits (UCP 600)
Foreword
This revision of the Uniform Customs and Practice for Documentary Credits (commonly called UCP) is the sixth revision of the rules since they were first promulgated in 1933. It is the fruit of more than three years of work by the International Chamber of Commerce’s (ICC) Commission on Banking Technique and Practice. ICC, which was established in 1919, had as its primary objective facilitating the flow of international trade at a time when nationalism and protectionism posed serious threats to the world trading system. It was in that spirit that the UCP were first introduced – to alleviate the confusion caused by individual countries’ promoting their own national rules on letter of credit practice. The objective, since attained, was to create a set of contractual rules that would establish uniformity in that practice, so that practitioners would not have to cope with a plethora of often conflicting national regulations. The universal acceptance of the UCP by practitioners in countries with widely divergent economic and judicial systems is a testament to the rules’ success.