The TD Bank Crash Course
in International Trade
Making our experience and expertise work for you!
Welcome to TD Bank’s
Crash Course in International Trade!
•The TD Bank is an international bank with a network of Trade
Services and Treasury units across Canada and offices
strategically located in key world financial centres.
•We have a thorough knowledge of global markets and the
ability to successfully respond to the demands of the
international marketplace.
•This Crash Course is intended to provide you with a basic
overview of international trade. However, as each trade
relationship and transaction is unique, we encourage you to
contact our nearest International Trade office. A listing of these
offices can be found by clicking on the International Offices link.
What will you learn from the
Crash Course?
•The risk issues involved when buying and selling internationally
from the perspective of both the Importer and the Exporter.
•The different methods used to effect payment in international
trade.
•The various types of Guarantees used in international trade.
•Definitions of important --and often confusing-- terms.
Risk Issues in International Trade
COUNTRY RISKS
In any business transaction,
there are risks. However,
these risks are emphasized
when dealing internationally.
Added to the commercial risks
present in a domestic
transaction are foreign
exchange as well as country
risks.
Stable political climate? War?
Revolution?
Positive economic environment?
Solid legal infrastructure?
Foreign exchange restrictions?
FOREIGN EXCHANGE RISKS
Volatile foreign currency?
COMMERCIAL RISKS
Reliable information concerning the
company’s track record? Insolvency of your
trading partner?
Default or termination on your contract?
Making and Receiving Payment Internationally :
International Payment Instruments
We now introduce you to the
different payment methods
available in settling an
international trade transaction.
The mechanics of these
methods and their advantages
and disadvantages from the
point of view of both the
Importer and the Exporter will
be discussed.
 Clean
Payments
 Documentary
Collections
 Letters of Credit
Clean Payments
Introduction: What is a Clean Payment?
 Basic Facts: Open Account & Payment in Advance
 Mechanics: How does a Clean Payment transaction work?
 Risk Analysis: Advantages and Disadvantages

Clean Payments
Introduction: What is a Clean Payment?
•Clean Payments are characterized by trust. Either the
Exporter sends the goods and trusts the Importer to pay
once the goods have been received, or the Importer trusts
the Exporter to send the goods after payment is effected.
•In the case of Clean Payment transactions, all shipping
documents, including title documents, are handled
directly by the trading parties. The role of banks is
limited to clearing funds as required.
Clean Payments
Basic Facts: Open Account & Payment in Advance
•There are two types of Clean Payments: Open Account &
Payment in Advance.
•Open Account. The Importer is trusted to pay the Exporter
after receipt of the goods.
•Payment in Advance. An arrangement whereby the
Exporter is trusted to ship the goods after receiving payment
from the Importer.
Clean Payments
Mechanics: How does an Open Account transaction work?
OPEN ACCOUNT: The
Exporter ships the goods
and the documents directly
to the Importer and waits
for the Importer to send
payment.
Exporter
GOODS
PAYMENT
1
2
Importer
Clean Payments
Mechanics: How does a Payment in Advance transaction work?
PAYMENT IN
ADVANCE: The Importer
sends payment directly to
the Exporter and waits for
the Exporter to send the
goods and documents.
Note: The Payment in
Advance and Open
Account schematics vary
only in the order in which
events take place.
Exporter
GOODS
PAYMENT
2
1
Importer
Risk Analysis: Clean Payments
Open Account
Advantages to Exporter:
•None - but could clinch the sale!
Disadvantages to Exporter:
•Assumes all risks
Advantages to Importer:
•Assumes no risks
•Delays use of company’s cash resources.
Disadvantages to Importer:
•None
Payment in
Advance
Advantages to Exporter:
•Assumes no risks
Disadvantages to Exporter:
•None
Advantages to Importer:
•None - but could secure low cost!
Disadvantages to Importer:
•Assumes all risks
•Opportunity cost of using company’s
cash resources until goods are received.
INTERNATIONAL PAYMENTS RISK SPECTRUM
As we move through the different ways to effect payment in international trade, we will build
the Risk Spectrum. The Risk Spectrum is intended to summarize the risks associated with
the payment methods in relation to the Exporter and the Importer. Notice that Open Account
and Payment in Advance sit at opposite ends of the Risk Spectrum.
LEAST
RISK TO
IMPORTER
HIGHEST
RISK TO
EXPORTER
•Open Account
•Payment in Advance
LEAST RISK
TO
EXPORTER
HIGHEST
RISK TO
IMPORTER
Documentary Collections
Introduction:
What is a Documentary Collection?
Basic Facts:
Documents Against Payment (D/P) &
Documents Against Acceptance (D/A)
Mechanics:
How does a Documentary Collection
work?
Risk Analysis: Advantages and Disadvantages of
Documentary Collections
Documentary Collections
Introduction: What is a Documentary Collection?
•A method of payment used in international trade whereby the
Exporter entrusts the handling of commercial and often
financial documents to banks and gives the banks instructions
concerning the release of these documents to the Importer.
•Banks involved do not provide any guarantee of payment. *
•Collections are subject to the the Uniform Rules for
Collections published by the International Chamber of
Commerce. The last revision of these rules came into effect
on January 1, 1996 and is referred to as the URC 522. TD
provides copies on request at the nearest International Trade
Services office.
*Except in the case of availized drafts. Please inquire at the nearest TD International
Trade Centre for details.
Documentary Collections
Basic Facts: Documents Against Payment (D/P) &
Documents Against Acceptance (D/A)
Documentary Collections may be carried out in two
different ways:
•Documents Against Payment. Documents are released to
the Importer only against payment. Also known as a Sight
Collection or Cash Against Documents (CAD).
•Documents Against Acceptance. Documents are released
to the Importer only against acceptance of a draft. Also
known as a Term Collection.
Documentary Collections
Mechanics: How does a Documentary Collection work?
The mechanics of a Documentary Collection are
easily understood when separated into the following
three steps:
• Flow of Goods
• Flow of Documents
• Flow of Payment
Documentary Collections:
Flow of Goods
After the Importer and the
Exporter have established a
sales contract and agree on a
Documentary Collection as
the method of payment, the
Exporter ships the goods. In a
Documentary Collection, the
Importer is known as the
“drawee” and the Exporter as
the “drawer”.
Exporter/Drawer
GOODS
Importer/Drawee
Documentary Collections:
Flow of Documents
Note: The Exporter’s Bank and the Remitting Bank need
not be the same. Also, the Collecting Bank and Presenting
Bank need not be the same. Each role could be performed
by a different bank.
2
Documents
Exporter/
Drawer
Remitting
Bank
1
Documents
After the goods are shipped, documents
originating with the Exporter (e.g. commercial
invoice) and the transport company (e.g. bill of
lading) are delivered to a bank, called the
Remitting Bank in the Collection process. The
role of the Remitting Bank is to send these
documents accompanied by a Collection
Instruction giving complete and precise
instructions to a bank in the Importer’s country,
referred to as the Collecting/ Presenting Bank
in the Collection process.
The Collecting/ Presenting Bank acts in
accordance with the instructions given in the
Collection Instruction and releases the
documents to the Importer against payment or
acceptance, according to the Remitting Bank’s
Collection instructions.
GOODS
3
Documents
4
Importer/
Drawee
Collecting/
Presenting Bank
Documentary Collections:
Flow of Payment
4
Payment is forwarded
to the Remitting Bank
for the Exporter’s
account. And the
Importer can now
present the transport
document* to the
carrier in exchange for
the goods.
*In this case, we are assuming that the
transport document is a title document.
Exporter/
Drawer
Remitting
Bank
3
GOODS
1
Importer/
Drawee
Documents
2
Presenting/
Collecting Bank
Risk Analysis: Documentary Collections
As discussed earlier, Documentary Collections may be settled in two different ways. Documents Against Payment
(D/P) refers to a Collection where the Importer receives the documents only in exchange for payment. With
Documents Against Acceptance (D/A), the Importer may obtain the documents in exchange for the acceptance of
the obligation to pay at a specified future date. These two methods of settlement carry different risks for both
Importers and Exporters.
Documents Against
Payment (D/P)
Documents Against
Acceptance (D/A)
Advantages to the Exporter:
Advantages to the Exporter:
•Less costly than a Letter of Credit.
•Documents are not released to the Importer until payment
has been effected.
•May provide formal/legal means to collect unpaid obligation.
•Less costly than a Letter of Credit.
Disadvantages to the Exporter:
•Risk of refusal of payment.
•Commercial and country risks not hedged.
Advantages to the Importer:
•Ability to examine documents before authorizing payment.
Disadvantages to the Exporter:
•Risk of non-acceptance of documents.
•Commercial and country risks not hedged.
•Although bill of exchange/draft is accepted by the Importer,
there is no guarantee of payment by the banks involved.
•Legal enforcement of unpaid obligation costly and timeconsuming.
•Unlike a Letter of Credit, a line of credit is not required, and
fees are minimal.
Advantages to the Importer:
Disadvantages to the Importer:
Disadvantages to the Importer:
•In the case that transport documents carry title, cannot
access goods until payment has been made.
•Dishonouring an accepted draft is a legal liability and may ruin
business reputation.
•Will receive goods before having to make payment.
INTERNATIONAL PAYMENTS RISK SPECTRUM
Documentary Collections offer more of a compromise in risk-taking between the Importer and
the Exporter than Clean Payments as illustrated in the diagram below.
HIGHEST
RISK TO
EXPORTER
•Open Account
LEAST
RISK TO
IMPORTER
•Documentary Collections
Documents Against Acceptance
Documents Against Payment
•Payment in Advance
LEAST RISK
TO
EXPORTER
HIGHEST
RISK TO
IMPORTER
Letters of Credit
Introduction: What is a Letter of Credit?
 Basic Facts:
 Revocable & Irrevocable Letter of Credit
 Sight & Term Letter of Credit
 Confirmed Letter of Credit
 Mechanics: How does a Letter of Credit transaction work?
 Risk Analysis: Advantages & Disadvantages

Letters of Credit
Introduction:What is a Letter of Credit?
•A Letter of Credit is a written undertaking by the Importer’s bank, known as the
Issuing Bank, on behalf of its customer, the Importer (Applicant), promising to effect
payment in favour of the Exporter (Beneficiary) up to a stated sum of money, within a
prescribed time limit and against stipulated documents.
•A key principle underlying Letters of Credit is that banks deal only in documents and
not in goods. The decision to pay under a Letter of Credit will be based entirely on
whether the documents presented to the bank appear on their face to be in accordance
with the terms and conditions of the Letter of Credit. It would be prohibitive for the
banks to physically check whether all merchandise has been shipped exactly as per
each letter of Credit.
•The International Chamber of Commerce (ICC) publishes internationally agreed-upon
rules, definitions and practices governing Letters of Credit, called “Uniform Customs
and Practice for Documentary Credits” (UCP). The last revision of these rules was
effective Jan. 1, 1994 and is referred to as the UCP 600. Copies of the UCP 600 are
available from a TD branch or our nearest TD International Trade Services office.
Letters of Credit
Basic Facts: Revocable/Irrevocable & Sight/Term

Letters of Credit are either
Revocable or Irrevocable:
– A Revocable Letter of Credit
can be revoked without the
consent of the Exporter,
meaning that it may be
canceled or changed up to the
time the documents are
presented. Revocable Letters of
Credit are very rarely used.
– An Irrevocable Letter of
Credit cannot be canceled or
amended without the consent of
all parties including the
Exporter. Unless otherwise
stipulated, all Letters of Credit
are irrevocable.

Letters of Credit may be settled
either by sight or by acceptance:
– If payment is to be made at the
time that documents are
presented, this is referred to as
a sight Letter of Credit.
– If payment is to be made at a
future fixed time from the
presentation of documents, this
is referred to as a term Letter
of Credit
Letters of Credit
Basic Facts: Confirmed Letter of Credit
•Under a Confirmed Letter of Credit, a bank, called the
Confirming Bank, adds its commitment to that of the Issuing Bank
to pay the Exporter under the Letter of Credit provided all terms
and conditions of the Letter of Credit are met. The Confirming
Bank is usually located in the same country as the Exporter.
•An Exporter would request a Confirmed Letter of Credit if it does
not consider the financial strength of the Issuing Bank or the
country in which it is located to be acceptable risks.
Letters of Credit
Mechanics: How does a Letter of Credit work?
The mechanics of a Letter of Credit are easily
understood when separated into the following three
steps:
• Issuance
• Flow of Goods
• Flow of Documents & Payment
Letters of Credit:
Issuance
After the trading parties agree on a sale
of goods where payment is made by
Letter of Credit, the Importer requests
that its bank (the Issuing Bank) issue a
Letter of Credit in favour of the
Exporter (Beneficiary).
The Issuing Bank then sends the Letter
of Credit to the Advising Bank. A
request may be included for the
Advising Bank to add its confirmation.
The Advising Bank is usually located in
the country where the Exporter does
business and may be the Exporter’s
bank, but does not have to be.
Next, the Advising/Confirming Bank
verifies the Letter of Credit for
authenticity and sends it to the Exporter.
4
Exporter/
Beneficiary
Advice
/Confirmation
Advising/
of the Letter of
Credit.
Confirming Bank
Request to advise
& possibly
confirm the
Letter of Credit
Contract
Negotiations
1
3
Importer applies for
Letter of Credit.
Importer/
Applicant
2
Issuing Bank
Note: For the purpose of the Crash Course, the Advising Bank is
also acting as the Confirming Bank. However, the roles of
advising and confirmingthe Letter of Credit may be performed
by two separate banks.
Letters of Credit:
Flow of Goods
Upon receipt of the Letter of
Credit, the Exporter reviews the
Letter of Credit to ensure that it
corresponds to the terms and
conditions in the purchase and
sales agreement; that the
documents stipulated in the Letter
of Credit can be produced; and
that the terms and conditions of
the Letter of Credit can be
fulfilled. Assuming the Exporter
is in agreement with the above, it
arranges for shipment of the
goods.
Exporter/Beneficiary
GOODS
Importer/Applicant
Letters of Credit:
Flow of Documents & Payment
3
Exporter/
Beneficiary
2
Documents
Advising/
Confirming Bank
4
GOODS
Documents
After the goods are shipped, the
Exporter presents the documents
specified in the Letter of Credit
to the Advising/ Confirming
Bank.
Once the documents are checked
and found to comply with the
Letter of Credit (i.e. without
discrepancies), the Advising/
Confirming Bank forwards these
documents to the Issuing Bank.
The drawing is negotiated, paid
or accepted as the case may be.
Con’d...
1
Importer/
Applicant
Issuing Bank
5
Letters of Credit:
Flow of Documents & Payment
Exporter/
Beneficiary
2
Documents
Advising/
Confirming Bank
4
Documents
In turn, the Issuing Bank
examines the documents to
ensure they comply with the
Letter of Credit. If the
documents are in order, the
Issuing Bank will obtain
payment from the Importer for
payment already made to the
Confirming Bank.
Documents are delivered to the
Importer to allow it to take
possession of the goods.
3
GOODS
1
7
Documents
Importer/
Applicant
6
Issuing Bank
5
Risk Analysis: Letters of Credit
Importer
Exporter
Advantages:
Advantages:
•Importer is assured that, for
the Exporter to be paid, all
terms and conditions of the
Letter of Credit must be met.
•An undertaking from the Issuing Bank
that you will receive payment under the
Letter of Credit provided that you meet all
terms and conditions of the Letter of
Credit.
•Ability to negotiate more
favourable trade terms with the
Exporter when payment by
Letter of Credit is offered.
•Shifts credit risk from the Importer to the
Issuing bank.
Disadvantages:
Disadvantages:
•A Letter of Credit assures
correct documents but not
necessarily correct goods.
•Documents must be prepared in strict
compliance with the requirements
stipulated in the Letter of Credit. Noncompliance leaves Exporter exposed to risk
of non-payment.
•Ties up line of credit.
•Not obligated to ship against a Letter of
Credit that is not issued as agreed.
INTERNATIONAL PAYMENTS RISK SPECTRUM
We have completed the International Payments Risk Spectrum. Whereas payment settled via
Open Account and Payment in Advance represent a high degree of risk for one of the parties
involved, both Documentary Collections and Letters of Credit offer a compromise in risks
facing the Importer and the Exporter.
HIGHEST
RISK TO
EXPORTER
•Open Account
LEAST
RISK TO
IMPORTER
•Documentary Collections
Documents Against Acceptance
Documents Against Payment
•Letters of Credit
Unconfirmed
Confirmed
•Payment in Advance
LEAST RISK
TO
EXPORTER
HIGHEST
RISK TO
IMPORTER
You have almost made it...
•You have completed the section of the Crash Course
that deals with the different methods used to effect
payment in international trade.
•Now we move to the final objective of the Course: to
look at Guarantees which are often required to support
foreign contracts.
Guarantees
Introduction: What is a Guarantee?
Basic Facts: Bid, Advance Payment &
Performance Guarantees
Mechanics: How does a transaction involving a
Guarantee work?
Guarantees
Introduction: What is a Guarantee?
•A Guarantee is issued by a bank on behalf of its customer, the Exporter, as financial
assurance to the Importer to be collected in the event that the Exporter defaults on certain
specified contractual obligations.
•The bank that issues a Guarantee will pay the named beneficiary the amount specified on
presentation of a written demand as outlined in the Guarantee.
•While there are standard Guarantee formats, Guarantees can be tailored to meet your
specific contractual needs.
•Often Standby Letters of Credit are used instead of Guarantees. Standby Letters of Credit
work in much the same way as Guarantees, offering financial assurance to the Importer if
the Exporter defaults on agreed-upon contractual obligations. However, there are at least
two important ways in which Standby Letters of Credit differ from Guarantees :
 Standby Letters of Credit are governed by the International Chamber of
Commerce’s UCP while Guarantees are subject to the laws of the country of the
Issuing Bank.
 Banks in several countries, including the United States, are not empowered to issue
Guarantees, and therefore use Standby Letters of Credit instead.
Guarantees
Basic Facts: Types of Guarantees
These types of Guarantees are commonly requested in foreign contracts:
•Bid Guarantee:
•An Importer will often ask foreign contract bidders to post a Bid Guarantee as
evidence of serious intent to supply the goods or services if selected. In the event that
the selected supplier is unwilling or unable to carry out the contract, the Importer can
collect the amount of the Bid Guarantee.
•Advance Payment Guarantee:
•An Advance Payment Guarantee covers the amount of the down-payment the Exporter
requests from the Importer and provides the Importer with some security that, if the
Exporter does not deliver under the terms of the contract, the amount of the downpayment would be retrievable.
•Performance Guarantee:
•A Performance Guarantee permits the Importer to draw on the Guarantee if the
Exporter fails to perform according to the terms of the contract. For example, in the
event that the Exporter is unable to complete the contract as agreed halfway through a
project, the Importer is compensated with the amount of the Performance Guarantee.
Guarantees
Mechanics: How does a transaction involving a Guarantee work?
During contract negotiations, the
Importer requests that the Exporter
provide a Guarantee securing an aspect
of the contract (e.g. bid, advance
payment). The Exporter (Applicant)
enlists its bank (Issuing Bank) to issue
the Guarantee in favour of the
Importer (Beneficiary) for a specified
amount and within a stated time frame.
In the event of default by the Exporter,
the Importer would demand against the
Guarantee through the Advising Bank.
2
Exporter/
Applicant
Applies for
Guarantee.
Issuing Bank
1
Guarantee is sent to a
correspondent bank of
the Issuing Bank for
advice to the Importer.
Contract
Negotiations
3
Advice of the
Guarantee.
A correspondent bank is a foreign
bank with which the Issuing Bank
has established a relationship where
secure transactions may be processed.
Importer/
Beneficiary
4
Advising Bank
Congratulations!
You made it through the Crash Course.
Now test your knowledge by taking TD’ s
International Trade Quiz!