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Secrets of International Trade

 

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Trade Open Account

"The only reason that the bank's collection services are needed is because the exporter does not trust the foreign importer."

 

If trust exists, there is no need to use and pay for the bank's services.

There would be instead the same payment terms as adopted by most commercial transactions within a country - whereby one firm sells goods to another, sends them the invoice, and in due course (usually within 30 says) receive payment.

This type of payment arrangement is known as open account.

Although, banks provide a useful and efficient collection service for exporter, they do not do it free of charge. So the cost involved for both collection of payment and the provision of financing when credit terms are involved, should be built into the exporter's quoted price to its foreign buyer.

Letters of Credit
 

Payment cannot be assured merely by using a documentary draft. Although the exporter may have shipped the goods as specified in the export sales agreement.

The foreign importer, perhaps having changed its mind or its financial circumstances, may not pay for the goods when the documents are presented or when the time draft, even though previously accepted, falls due for payment.

 

 

 
 

Consequently, to be on the safe side, the exporter may require a bank letter of credit, as well as a draft.

A letter of credit is a document issued by a bank at the request of the importer. Whereby the bank agrees to accept and/or pay drafts drawn upon it by the exporter so long as the conditions set out in the letter of credit (e.g., latest shipping date, no partial shipments etc.) are complied with.

 

Confirmed versus Unconfirmed

Irrevocable letter of credit from a bank, is still not a cast-iron guarantee of payment.

Not every foreign bank is scrupulous or financially solvent.

Sometimes a foreign bank, for one reason or another, will not honor its own financial commitment or perhaps due to, the sudden imposition or alteration of foreign exchange controls in the importing country may make payment impossible, even though the foreign bank wishes to honor its commitment.

Consequently, the exporter should, if it is unsure about the foreign bank's reliability or the foreign exchange situation - insist on not just  an irrevocable letter of credit but one that is confirmed as well.

 

 

 
  A confirmed, irrevocable letter of credit, means that the exporter's bank undertakes to pay the importer, should the foreign bank fail to do so.

The exporter's bank may be reluctant to confirm a letter of credit if it has any doubt as to the trustworthiness of the foreign bank or the possibility that foreign exchange controls may prevent the conversion of the importer's currency into the desired foreign currency.

In such a case, it may refuse confirmation unless the full amount of the funds is transferred to it right away from the foreign bank. Whatever the case, the exporter's bank will charge for such a service.

By stipulating that the foreign importer arranges for a confirmed irrevocable letter of credit, the exporter knows that if he ships the goods as agreed, he will have the foreign bank's assurance of payment as well as the assurance of his own bank.

Trade Consignment
 

As a method of promoting the sale of its goods, an exporter may be willing to offer consignment terms. This means that the foreign importer agrees to receive and stock the goods but only pay for them, if and when sold.

The exporter retains ownership of them and if all or part of them cannot be sold, the exporter bears all the loss - either having them returned to the exporter's country or sold locally at perhaps greatly reduced prices.

Consignment should be considered only if it is absolutely necessary as a way of introducing a product, the value of the consignment is relatively small, the intention is to switch to more conventional sales arrangements once the product has "taken off".

 

 

 
Part 1/ 4
Get Paid for exporting.
No point selling if you are not getting your payment

 
Part 2/4 <This Page
Bank's collection services are needed because the exporter does not trust the foreign importer

 
Part 3/4
Letters of Credit Collection Procedures "steps involved in collecting an exporter's money"

 
Part 4/4
New  Internet eLC technology
 
 
 

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