Trade Finance Guide (Part-1)

০৬ ই ডিসেম্বর, ২০১৪ সন্ধ্যা ৬:২০

TRADE FINANCE
Offers a means to convert export opportunities into sales by managing the risks associated with doing business internationally, particularly the challenges of getting paid on a timely basis.

METHODS OF PAYMENT IN INTERNATIONAL TRADE

Cash-in-Advance
With this payment method, the exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms.

Letters of Credit
Letters of credit (LCs) are among the most secure instruments available to international traders. An LC is a commitment by a bankon behalf of the buyer that payment will be made to the exporter provided that the terms and conditions have been met, as verified through the presentation of all required documents. The buyer paysits bank to render this service. An LC is useful when reliable creditinformation about a foreign buyer is difficult to obtain, but you are satisfied with the creditworthiness of your buyer’s foreign bank. An LC also protects the buyer since no payment obligation arises until the goods have been shipped or delivered as promised.

Documentary Collections
A documentary collection is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. Documentary collections involve the use of a draft that requires the importer to pay the face amount either on sight (document against payment—D/P) or on a specified date in the future (document against acceptance—D/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit.

Open Account
An open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Due to the intense competition for 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 face the possibility of the loss of the sale to their competitors. However, with the use of one or more of the appropriate trade finance techniques, such as export credit insurance, the exporter can offer open competitive account terms in the global market while substantially mitigating the risk of nonpayment by the foreign buyer.

CASH-IN-ADVANCE

Applicability
Recommended for use in high-risk trade relationships or exportmarkets, and ideal for Internet-based businesses.

Risk
Exporter is exposed to virtually no risk as the burden of risk is placed nearly completely on the importer.

Pros
> Payment before shipment
> Eliminates risk of nonpayment

Cons
> May lose customers to competitors over payment terms
> No additional earnings through financing operations

LETTERS OF CREDIT

Applicability
Recommended for use in new or less-established trade relationships when you are satisfied with the creditworthiness of the buyer’s bank.

Risk
Risk is evenly spread between seller and buyer provided all termsand conditions are adhered to.

Pros
> Payment after shipment
> A variety of payment, financing and risk mitigation options

Cons
> Requires detailed, precise documentation
> Relatively expensive in terms of transaction costs

DOCUMENTARY COLLECTIONS

Applicability
Recommended for use in established trade relationships and instable export markets.

Risk
Exporter is exposed to more risk as D/C terms are more convenientand cheaper than an LC to the importer.

Pros
> Bank assistance in obtaining payment
> The process is simple, fast, and less costly than LCs
> DSO improved if using a draft with payment at a future date

Cons
> Banks’ role is limited and they do not guarantee payment
> Banks do not verify the accuracy of the documents

OPEN ACCOUNT

Applicability
Recommended for use (1) in secure trading relationships or marketsor (2) in competitive markets to win customers with the use of one or more appropriate trade finance techniques.

Risk
Exporter faces significant risk as the buyer could default on payment obligation after shipment of the goods.

Pros
> Boost competitiveness in the global market
> Establish and maintain a successful trade relationship

Cons
> Exposed significantly to the risk of nonpayment
> Additional costs associated with risk mitigation measures

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