International trade payment and finance with

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International trade payment and finance with

Payment Risk Diagram Key Points International trade presents a spectrum of risk, which causes uncertainty over the timing of payments between the exporter seller and importer foreign buyer. For exporters, any sale is a gift until payment is received. Therefore, exporters want to receive payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer.

For importers, any payment is a donation until the goods are received. Therefore, importers want to receive the goods as soon as possible but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to pay the exporter.

International trade payment and finance with

Cash-in-Advance With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters.

With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance.

Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms. Letters of Credit Letters of credit LCs are one of the most secure instruments available to international traders.

An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer establishes credit and pays his or her bank to render this service.

An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents.

The collection letter gives instructions that specify the documents required for the transfer of title to the goods. Open Account An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days.

Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad.

Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. Exporters can offer competitive open account terms while substantially mitigating the risk of non-payment by using one or more of the appropriate trade finance techniques covered later in this Guide.

When offering open account terms, the exporter can seek extra protection using export credit insurance. Consignment Consignment in international trade is a variation of open account in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer.

An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of an independent distributor or agent.

Consignment helps exporters become more competitive on the basis of better availability and faster delivery of goods. Selling on consignment can also help exporters reduce the direct costs of storing and managing inventory.

The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider.

International Trade Finance

Appropriate insurance should be in place to cover consigned goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment.This trend is attributable to the increased globalization of the world economies and the availability of trade payment and finance from the international banking community.

As shown in figure , there are four primary methods of payment for international .

International trade payment and finance with

International trade financing is required especially to get funds to carry out international trade operations. Depending on the types and attributes of financing, there are five major methods of transactions in international trade.

Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer.

Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade.

A letter of credit is a bank document assuring that a seller will receive payment as long as certain documentary delivery conditions have been met view all. Open Slide. Bank Guarantees. an undertaking given by a bank or financial institution on behalf of an applicant and in favor of a beneficiary.

International trade financing is required especially to get funds to carry out international trade operations. Depending on the types and attributes of financing, there are five major methods of transactions in international trade.

This webcast will help exporters and importers understand the three international trade finance methods of payment? to include Letters of Credit, Documentary Collections and Open Account? and their variations.

Open Account | schwenkreis.com