Page 66 - Export and Trade

honour the DC; the exporter is relying primarily on Letter of Comfort will be issued to them advising that
the undertaking of the overseas issuing bank to make the paying bank will allocate funds to them following a
payment. successful presentation of documents under the DC.
The importer can gain additional protection through While the payment instructions of the exporter/assignor
WKH GRFXPHQW GH¿QLWLRQV H J E\ FDOOLQJ IRU LQGHSHQGHQW are usually honoured it is not the same as a transferable
LQVSHFWLRQ RU TXDOLW\ FHUWL¿FDWHV DQG FDQ FRQWURO '& ,W LV LPSRUWDQW WR UHPHPEHU WKDW WKH EHQH¿FLDU\ FDQ
delivery schedules and other aspects of the transaction only assign the proceeds of the DC, not the rights.
E\ VWLSXODWLQJ VSHFL¿F FRQGLWLRQV VXFK DV D ODWHVW
shipment date. Advance Payments
The importer is assured that payment will not be There is no risk for the exporter when payment is
made until the issuing bank has checked that the received in advance of the goods being dispatched.
documents presented are in full conformity with the DC However, if payment is made by cheque, it should be
terms and conditions. However, the importer takes the remembered that this does not constitute payment
risk that the goods may be of inferior quality. until the cheque has been cleared through the banking
The DC terms may provide for payment immediately system. For cheques payable abroad this can be a
XSRQ SUHVHQWDWLRQ RI FRQIRUPLQJ GRFXPHQWV VLJKW FUHGLW considerable period.
or at some future date taking account of any extended Advance Payments need not always be for the full
payment terms granted by the seller to the buyer (usance value of the sales contract; it is quite common for a
RU DFFHSWDQFH FUHGLW )RU XVDQFH RU DFFHSWDQFH FUHGLWV partial advance payment to be made, particularly for
SD\PHQW LV PDGH DQG WKH LPSRUWHU¶V DFFRXQW GHELWHG DW contracts involving capital goods.
WKH HQG RI WKH H[WHQGHG WHUP L H RQ WKH PDWXULW\ GDWH This method of payment is the least secure for the
However, the shipping documents are usually released LPSRUWHU ZKR LQ DGGLWLRQ WR FDVKÀRZ SUHVVXUH KDV WR
to the importer at the time they are presented to the face several risks:
issuing bank, enabling the goods to be collected. •Goodsmayneverbeshipped.
Very few risks arise for the exporter because the •Goodsmaybeshippedlate.
potential problem areas of the buyer risk and country •Thewronggoodsmaybeshipped.
risk can be eliminated through the addition of the • Problems with documentation.
µFRQ¿UPDWLRQ¶ RI WKH DGYLVLQJ EDQN WKHUHE\ WUDQVIHUULQJ
the responsibility from the importer’s bank overseas, to Other methods of securing payment:
a more familiar bank in the country of the exporter. Credit Insurance
By using DCs, the exporter knows, usually before Credit Insurance is a common feature of Open Account
manufacture or shipment, the precise terms and trade and its value in the management of commercial
conditions which must be met in order to obtain payment risk is widely acknowledged. Companies employing this
and when that payment will be received. The exporter business practice can safeguard themselves against
should carefully check all DC terms and conditions the unpredictability of buyer default, gain an active
upon receipt. If they include unacceptable conditions partner in risk management and facilitate access to
RU GR QRW UHÀHFW WKH XQGHUO\LQJ FRPPHUFLDO FRQWUDFW WUDGH ¿QDQFH
amendment of the DC should be arranged prior to Credit Insurance is much more conditional than DCs
shipment. The exporter must be able to present the and not an independent obligation. However, during
correct documents and comply fully with the terms and GLI¿FXOWLHV H J D ¿QDQFLDO FULVLV OLPLWV FDQ VRPHWLPHV
conditions of the credit to ensure payment. Failure to become scarce or disappear entirely.
do so could result in the exporter losing the protection
of the DC. Bank Guarantees
*XDUDQWHHV RIWHQ UHIHUUHG WR DV %RQGV DUH
Assignment used extensively in international trade to secure
There is a growing trend for exporters to assign an performance or other obligations. They provide the
element of the proceeds due from the presentation of EHQH¿FLDU\ ZLWK DFFHVV WR D VXP RI PRQH\ VKRXOG WKH
documents under a DC to help conclude deals. SULQFLSDO DSSOLFDQW IDLO WR IXO¿O FRQWUDFWXDO RU RWKHU
,I WKH H[SRUWHU QHHGV WR VXEFRQWUDFW WR DQRWKHU ¿UP obligations in respect of an underlying transaction,
WR HQDEOH KLP WR IXO¿O KLV FRQWUDFW DQ DVVLJQPHQW PD\ contract or order. Such guarantees usually promise
be given to the third party. Subject to their approval, a payment on demand – i.e. upon presentation by the

64 NZ Export & Trade Handbook 2018