Financing Foreign Trade

Reading 1

Reading tasks

A Understanding main points

Read the above text about payment methods for exporters and write the four methods in the correct positions according to their risks for the exporter.

Payment method:

1. ................open account..................

2. ...............Bills for collection...........

3. ............Documentary Credit...........

4. ...............Advance Payment ...........

B Understanding details

Mark these statements T (true) or F (false) according to the information in the text. Find the part of the text that gives the correct information.

Open account

1. The importer pays for the goods after receiving the documents. T

2. There is no contract involved. F

3. The exporter must be able to trust the buyer. T

Documentary credit

4. If a letter of credit is issued, the importer's bank agrees to pay for the goods without conditions. F

5. If a letter of credit is confirmed, the exporter's bank takes responsibility for payment. T

Bills for collection

6. Commercial documents and the document of title are always enclosed with a bill of exchange. F

7. Importers may not accept the bill of exchange until the goods arrive. T

8. Exporters can keep control of goods by sending bills of lading through the banking system. T

9. Exporters reduce risk if documents are released against acceptance of the bill rather than payment. F

Advance payment

10. This means that the importer has to pay before any goods are dispatched. T

C Information search

Match the risks (a-g) with the payment methods.

1. b c d f

2. a g

3. b c d e f

4. f

Vocabulary Tasks

A Key terms

Match these terms with their definitions. Example: 1 b

B Word search

Find a word or phrase in the text that has a similar meaning.

1. promise or guarantee given to or by a bank (para 2)

undertaking.......................

2. load of goods sent to a customer (para 7)

consignment........................

3. person or company that acts as a middleman in a transaction (para 9)

intermediary........................

4. date when a bill of exchange is due for payment (para 9)

maturity...........................

C Complete the sentence

Use an appropriate form of the words in the box to complete the sentences which describe the procedure for documentary collection.

Draw accept dishonor release remit forward dispatch present present

1. The first step the exporter takes is to ask his bank to ....draw..... a bill of exchange on the overseas buyer.

2. The exporter's bank ......forwards............. the bill of exchange, together with the commercial documents, to the importer's bank.

3. At the same time, the exporter......dispatches................ the goods.

4. The exporter must take care to .........present.............the correct documents to the bank.

5. When the importer........accepts..........the bill of exchange, the bank will......release.............the documents of title to the goods.

6. If the importer......dishonors.................the bill, the exporter may have to find an alternative buyer or ship the goods back again.

7. In some parts of the world, banks may be slow to .........remit..........payment to the exporter's bank.

Reading 2: How a letter of credit works

1 Read about the first four steps in a transaction involving a letter of credit, and number the steps 1 to 4, using the diagram below to help you.

ÿ The advising bank authenticates the letter of credit and sends the beneficiary (the seller) the details. The seller examines the details of the letter of credit to make sure that he or she can meet all the conditions. If necessary, he or she contacts the buyer and asks for amendments to be made. 4

ÿ The applicant (the buyer) completes a contract with the seller. 1

ÿ The issuing bank (the buyer's bank) approves the application and sends the letter of credit details to the seller's bank (the advising bank). 3

ÿ The buyer fills in a letter of credit application form and sends it to his or her bank for approval. 2

2 Now read about the next six steps, and number them 5 to 10 using the diagram below.

ÿ If the documents are in order, the advising bank sends them to the issuing bank for payment or acceptance. If the details are not correct, the advising bank tells the seller and waits for corrected documents or further instructions. 7

ÿ The advising/confirming bank pays the seller and notifies him or her that the payment has been made. 10

ÿ The issuing bank advises the advising (or confirming) bank that the payment has been made. 9

ÿ The issuing bank (the buyer's bank) examines the documents from the advising bank. If they are in order, the bank releases the documents to the buyer, pays the money promised or agrees to pay it in the future, and advises the buyer about the payment. (If the details are not correct, the issuing bank contacts the buyer for authorization to pay or accept the documents.) The buyer collects the goods. 8

ÿ The seller presents the documents to his or her bankers (the advising bank). The advising bank examines these documents against the details of the letter of credit and the International Chamber of Commerce rules. 6

ÿ When the seller (beneficiary) is satisfied with the conditions of the letter of credit, he or she ships the goods. 5

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