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					Exporters naturally want to get paid as quickly as possible, while importers usually prefer to
delay payment until they have received or resold the goods. Because of the intense competition
for export markets, being able to offer attractive payment terms c ustomary in the trade is often
necessary to make a sale. Exporters should be aware of the many financing options open to them
so that they choose the most acceptable one to both the buyer and the seller. In many cases,
government assistance in export financing for small and medium-sized businesses can increase a
firm's options. The following factors are important to consider in making decisions about

      The need for financing to make the sale. In some cases, favorable payment terms make
       a product more competitive. If the competition offers better terms and has a similar
       product, a sale can be lost. In other cases, the buyer may have preference for buying from
       a particular exporter, but might buy your product because of shorter or more secure credit
      The length of time the product is being financed. This determines how long the
       exporter will have to wait before payment is received and influences the choice of how
       the transaction is financed.
      The cost of different methods of financing. Interest rates and fees vary. Where an
       exporter can expect to assume some or all of the financing costs, their effect on price and
       profit should be well understood before a pro forma invoice is submitted to the buyer.
      The risks associated with financing the transaction. The riskier the transaction, the
       harder and more costly it will be to finance. The political and economic stability of the
       buyer's country can also be an issue. To provide financing for either accounts receivable
       or the production or purchase of the product for sale, the lender may require the most
       secure methods of payment, a letter of credit (possibly confirmed), or export credit
       insurance or guarantee.
      The need for pre-shipment finance and for post-shipment working capital.
       Production for an unusually large order, or for a surge of orders, may present unexpected
       and severe strains on the exporter's working capital. Even during normal periods,
       inadequate working capital may curb an exporter's growth. However, assistance is
       available through public and private sector resources discussed in this chapter.
For help in determining which financing options may be available or the most beneficial to your
exporting endeavors, the following sources may be consulted:

         Your banker;
         Your local Small Business Administration office;
         The Export-Import Bank
         Your state export promotion or export finance office.

Foreign Currency

A buyer and a seller who are in different countries rarely use the same currency. Payment is
usually made in either the buyer's or the seller's currency or in a third mutually agreed- upon

One of the risks associated with foreign trade is the uncertainty of the future exchange rates. The
relative value between the two currencies could change between the time the deal is concluded
and the time payment is received. If the exporter is not properly protected, a devaluation or
depreciation of the foreign currency could cause the exporter to lose money. For example, if the
buyer has agreed to pay 500,000 French francs for a shipment and the franc is valued at 20 cents,
the seller would expect to receive US$100,000. If the franc later decreased in value to be worth
19 US cents, payment under the new rate would be only US$95,000, a loss of US$5,000 for the
seller. On the other hand, if the foreign currency increases in value the exporter would get a
windfall in extra profits. Nonetheless, most exporters are not interested in speculating on foreign
exchange fluctuations and prefer to avoid risks.

One of the simplest ways for a exporter to avoid this type of risk is to quote prices and require
payment in a currency of their convenience. Then the burden of exchanging currencies and risk
are placed on the buyer. Exporters should also be aware if there are problems with currency
convertibility. Not all currencies are freely or quickly converted. Fortunately, the U.S. dollar is
widely accepted as an international trading currency, and so it is best to do transactions in US
If the buyer asks to make payment in a foreign currency, the exporter should consult an
international banker before negotiating the sales contract. Banks can offer advice on the foreign
exchange risks that exist with a particular currency. Some international banks can also help
hedge against such a risk, by agreeing to purchase the foreign currency at a fixed price in dollars,
regardless of the currency’s value at the time the customer pays. Banks will normally charge a
fee or discount the transaction for this service. If this mechanism is used, the bank's fee should be
included in the price quotation.

Types of payment

Foreign buyers often press exporters for longer payment periods. While it is true that liberal
financing is a means of enhancing export competitiveness, exporters need to weigh carefully the
credit or financing they extend to foreign customers. A useful guide for determining the
appropriate credit period is the normal commercial terms in the exporter's industry for
internationally traded products. Buyers generally expect to receive the benefits of such terms.
For off-the-shelf items like consumer goods, chemicals, and other raw materials, agricultural
commodities, and spare parts and components, normal commercial terms range with few
exceptions from 30 to 180 days. (An allowance may have to be made for longer shipment times
than are found in domestic trade, because foreign buyers are often unwilling to have the credit
period start before receiving the goods.) Custom- made or high- value capital equipment, on the
other hand, may warrant longer repayment periods. Once credit terms are extended to a buyer,
they tend to be precedent for future sales, so the exporter should review with special care any
credit terms extended to first-time buyers.

Exporters should follow the same careful credit principals they follow for domestic customers.
An important reason for controlling the credit period is the cost incurred through use of working
capital or through interest and fees. If the buyer is not responsible for paying these costs, then the
exporter should factor them into the selling price. The exporter also should recognize that longer
credit periods may increase any risk of default. Thus, the exporter must exercise judgement in
balancing competitiveness against consideration of cost and safety.
Customers are frequently charged interest on credit periods of a year or longer but less frequently
on short-term credit (up to 180 days). Most exporters absorb interest charges for short-term
credit unless the customer pays after the due date.

Obtaining cash immediately is usually a high priority with exporters. Converting export
receivables to cash at a discount with a bank is one way to do so. Another way is to expand
working capital resources. A third approach, suitable whe n the purchase involves capital goods
and the repayment period extends a year or longer, is to arrange for third-party financing. An
example of this is a bank making a loan directly to the buyer for the product, with the exporter
being paid immediately from the loan proceeds while the bank waits for payment and earns
interest. A fourth possibility, when financing is difficult to obtain, is to engage in countertrade to
afford the customer an opportunity to generate earnings with which to pay for the purchase.

These options may involve the payment of interest, fees, or other costs by the exporter. Some
options are more feasible when the amounts are in larger denominations. Exporters should also
determine whether they incur financial liability should the buyer de fault.
The different modes of payment are described below:

1. 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. Because
of the intense competition for export markets, foreign buyers often press exporters for open
account terms. In addition, the extension of credit b y 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, while this method of payment will definitely
enhance export competitiveness, exporters should thoroughly examine the political, economic,
and commercial risks, as well as cultural influences to ensure that payment will be received in
full and on time. It is possible to substantially mitigate the risk of nonpayment associated with
open account trade by using such trade finance techniques as export credit insurance and
factoring. Exporters may also wish to seek export working capital financing to ensure that they
have access to financing for both the production for export and for any credit while waiting to be

Key Points

• The goods, along with all the necessary documents, are shipped directly to the importer who
agrees to pay the exporter’s invoice at a future date, usually in 30 to 90 days.

• Exporter should be absolutely confident that the importer will accept shipment and pay at
agreed time and that the importing country is commercially and politically secure.

• Open account terms may help win customers in competitive markets, if used with one or more
of the appropriate trade finance techniques that mitigate the risk of nonpayment.

Characte ristics of an Open Account


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

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


• Boost competitiveness in the global market

• Establish and maintain a successful trade relatio nship


• Exposed significantly to the risk of nonpayment

• Additional costs associated with risk mitigation measures

How to Offe r Open Account Terms in Competitive Markets

Open account terms may be offered in competitive markets with the use of one or more of the
following trade finance techniques: (1) Export Working Capital Financing, (2) Government-
Guaranteed Export Working Capital Programs, (3) Export Credit Insurance, (4) Export
Factoring, and (5) Forfaiting.

Export Working Capital Financing

To extend open account terms in the global market, the exporter who lacks sufficient liquidity
needs export working capital financing that covers the entire cash cycle from purchase of raw
materials through the ultimate collection of the sales proceeds. Export working capital facilities
can be provided to support export sales in the form of a loan or revolving line of credit.

Government-Guaranteed Export Working Capital Programs

The Export-Import Bank of the United States and the U.S. Small Business Administration offer
programs that guarantee export working capital facilities to U.S. exporters. With these programs,
U.S. exporters are able to obtain needed facilities from commercial lenders when financing is
otherwise not available or when their borrowing capacity needs to be increased.
Export Credit Insurance

Export credit insurance provides protection against commercial losses—default, insolvency,
bankruptcy, and political losses—war, nationalization, currency inconvertibility, etc. It allows
exporters to increase sales by offering liberal open account terms to new and existing customers.
Insurance also provides security for banks providing working capital and financing exports.

Export Factoring

Factoring in international trade is the discounting of a short-term receivable (up to 180 days).
The exporter transfers title to its short-term foreign accounts receivable to a factoring house for
cash at a discount from the face value. It allows an exporter to ship on open account as the factor
assumes the financial ability of the importer to pay and handles collections on the receivables.
The factoring house usually works with consumer goods.


Forfaiting is a method of trade financing that allows the exporter to sell its medium-term
receivables (180 days to 7 years) to the forfaiter at a discount, in exchange for cash. With this
method, the forfaiter assumes all the risks, enabling the exporter to extend open account terms
and incorporate the discount into the selling price. Forfaiters usually work with capital goods,
commodities, and large projects.

2. Letter of credit

Letters of credit accomplish their purpose by substituting the credit of the bank for that of the
customer, for the purpose of facilitating trade. There are basically two types: commercial and
standby. The commercial letter of credit is the primary payment mechanism for a transaction,
whereas the standby letter of credit is a secondary payment mechanism.

Commercial Letter of Credit
Commercial letters of credit have been used for centuries to facilitate payment in international
trade. Their use will continue to increase as the global economy evolves.
Letters of credit used in international transactions are governed by the International Chamber of
Commerce Uniform Customs and Practice for Documentary Cred its. The general provisions and
definitions of the International Chamber of Commerce are binding on all parties. Domestic
collections in the United States are governed by the Uniform Commercial Code.

A commercial letter of credit is a contractual agreement between a bank, known as the issuing
bank, on behalf of one of its customers, authorizing another bank, known as the advising or
confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its
customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings
made under the credit. The beneficiary is normally the provider of goods and/or services.
Essentially, the issuing bank replaces the bank's customer as the payee.

Elements of a Letter of Credit

       A payment undertaking given by a bank (issuing bank)
       On behalf of a buyer (applicant)
       To pay a seller (beneficiary) for a given amount of money
       On presentation of specified documents representing the supply of goods
       Within specified time limits
       Documents must conform to terms and conditions set out in the letter of credit
       Documents to be presented at a specified place

The beneficiary is entitled to payment as long as he can provide the documentary evidence
required by the letter of credit. The letter of credit is a distinct and separate transaction from the
contract on which it is based. All parties deal in documents and not in goods. The issuing bank is
not liable for performance of the underlying contract between the customer and beneficiary. The
issuing bank's obligation to the buyer, is to examine all documents to insure that they meet all the
terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants
that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms
to the letter of credit, the seller must be paid by the bank.
Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute
upon the completion of the terms and conditions of the letter of credit. Under the provisions of
the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable
amount of time after receipt of the documents to honor the draft.

The issuing banks' role is to provide a guarantee to the seller that if compliant documents are
presented, the bank will pay the seller the amount due and to examine the documents, and only
pay if these documents comply with the terms and conditions set out in the letter of credit.

Typically the documents requested will include a commercial invoice, a transport document such
as a bill of lading or airway bill and an insurance document; but there are many others. Letters of
credit deal in documents, not goods.

Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the
beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of
credit is valid. In addition, the advising bank would be responsible for sending the documents to
the issuing bank. The advising bank has no other obligation under the letter of credit. If the
issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.

Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the
issuing bank, the correspondent obligates itself to insure payment under the letter of credit. The
confirming bank would not confirm the credit until it evaluated the country and bank where the
letter of credit originates. The confirming bank is usually the advising bank.

Letter of Credit Characte ristics

Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the
beneficiary, but also any bank nominated by the beneficiary. Negotiable instruments are passed
freely from one party to another almost in the same way as money. To be negotiable, the letter of
credit must include an unconditional promise to pay, on demand or at a definite time. The
nominated bank becomes a holder in due course. As a holder in due course, the holder takes the
letter of credit for value, in good faith, without notice of any claims against it. A holder in due
course is treated favorably under the UCC.

The transaction is considered a straight negotiation if the issuing bank's payment obligation
extends only to the beneficiary of the credit. If a letter of credit is a straight negotiation it is
referenced on its face by "we engage with you" or "available with ourselves". Under these
conditions the promise does not pass to a purchaser of the draft as a holder in due course.

Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be
revoked or modified for any reason, at any time by the issuing bank without notification. A
revocable letter of credit cannot be confirmed. If a correspondent bank is engaged in a
transaction that involves a revocable letter of credit, it serves as the advising bank.

Once the documents have been presented and meet the terms and conditions in the letter of
credit, and the draft is honored, the letter of credit cannot be revoked. The revocable letter of
credit is not a commonly used instrument. It is generally used to provide guidelines for shipment.
If a letter of credit is revocable it would be referenced on its face.

The irrevocable letter of credit may not be revoked or amended without the agreement of the
issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the
issuing bank insures the beneficiary that if the required documents are presented and the terms
and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is
referenced on its face.

Transfer and Assignment
The beneficiary has the right to transfer or assign the right to draw, under a credit only when the
credit states that it is transferable or assignable. Credits governed by the Uniform Commercial
Code (Domestic) maybe transferred an unlimited number of times. Under the Uniform Customs
Practice for Documentary Credits (International) the credit may be transferred only once.
However, even if the credit specifies that it is nontransferable or nonassignable, the beneficiary
may transfer their rights prior to performance of conditions of the credit.

Sight and Time Drafts
All letters of credit require the beneficiary to present a draft and specified documents in order to
receive payment. A draft is a written order by which the party creating it, orders another party to
pay money to a third party. A draft is also called a bill of exchange.

There are two types of drafts: sight and time. A sight draft is payable as soon as it is presented
for payment. The bank is allowed a reasonable time to review the documents before making

A time draft is not payable until the lapse of a particular time period stated on the draft. The bank
is required to accept the draft as soon as the documents comply with credit terms. The issuing
bank has a reasonable time to examine those documents. The issuing bank is obligated to accept
drafts and pay them at maturity.

Standby Letter of Credit
The standby letter of credit serves a different function than the commercial letter of credit. The
commercial letter of credit is the primary payment mechanism for a transaction. The standby
letter of credit serves as a secondary payment mechanism. A bank will issue a standby letter of
credit on behalf of a customer to provide assurances of his ability to perform under the terms of a
contract between the beneficiary. The parties involved with the transaction do not expect that the
letter of credit will ever be drawn upon.

The standby letter of credit assures the beneficiary of the performance of the customer's
obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of
invoices, with evidence that the customer has not performed its obligation. The bank is obligated
to make payment if the documents presented comply with the terms of the letter of credit.

Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the
refund of advance payment, to support performance and bid obligations, and to insure the
completion of a sales contract. The credit has an expiration date.
The standby letter of credit is often used to guarantee performance or to strengthen the credit
worthiness of a customer. In the above example, the letter of credit is issued by the bank and held
by the supplier. The customer is provided open account terms. If payments are made in
accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller
pursues the customer for payment directly. If the customer is unable to pay, the seller presents a
draft and copies of invoices to the bank for payment.

The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these
provisions, the bank is given until the close of the third banking day after receipt of the
documents to honor the draft.

Procedures for Using the Tool
The following procedures include a flow of events that follow the decision to use a Commercial
Letter of Credit. Procedures required to execute a Standby Letter of Credit are less rigorous. The
standby credit is a domestic transaction. It does not require a correspondent bank (advising or
confirming). The documentation requirements are also less tedious.

Step-by-step process:
      Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee
      Buyer applies to his bank for a letter of credit in favor of the seller.
      Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its
       correspondent bank (advising or confirming). The correspondent bank is usually located
       in the same geographical location as the seller (beneficiary).
      Advising bank will authenticate the credit and forward the original credit to the seller
      Seller (beneficiary) ships the goods, then verifies and develops the documentary
       requirements to support the letter of credit. Documentary requirements may vary greatly
       depending on the perceived risk involved in dealing with a particular company.
      Seller presents the required documents to the advising or confirming bank to be
       processed for payment.
      Advising or confirming bank examines the documents for compliance with the terms and
       conditions of the letter of credit.
      If the documents are correct, the advising or confirming bank will claim the funds by:
           o   Debiting the account of the issuing bank.
           o   Waiting until the issuing bank remits, after receiving the documents.
           o   Reimburse on another bank as required in the credit.
      Advising or confirming bank will forward the documents to the issuing bank.
      Issuing bank will examine the documents for compliance. If they are in order, the issuing
       bank will debit the buyer's account.
      Issuing bank then forwards the documents to the buyer.

Standard Forms of Docume ntation
When making payment for product on behalf of its customer, the issuing bank must verify that
all documents and drafts conform precisely to the terms and conditions of the letter of credit.
Although the credit can require an array of documents, the most common documents that must
accompany the draft include:

Commercial Invoice
The billing for the goods and services. It includes a description of merchandise, price, FOB
origin, and name and address of buyer and seller. The buyer and seller information must
correspond exactly to the description in the letter of credit. Unless the letter of credit specifically
states otherwise, a generic description of the merchandise is usually acceptable in the other
accompanying documents.

Bill of Lading
A document evidencing the receipt of goods for shipment and issued by a freight carrier engaged
in the business of forwarding or transporting goods. The documents evidence control of goods.
They also serve as a receipt for the merchandise shipped and as evidence of the carrier's
obligation to transport the goods to their proper destination.

Warranty of Title
A warranty given by a seller to a buyer of goods that states that the title being conveyed is good
and that the transfer is rightful. This is a method of certifying clear title to product transfer. It is
generally issued to the purchaser and issuing bank expressing an agreement to indemnify and
hold both parties harmless.

Letter of Indemnity
Specifically indemnifies the purchaser against a certain stated circumstance. Indemnification is
generally used to guaranty that shipping documents will be provided in good order when

Common Defects in Documentation
About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in
the documents that causes them to be in non-compliance to the letter of credit. Requirements set
forth in the letter of credit cannot be waived or altered by the issuing bank without the express
consent of the customer. The beneficiary should prepare and examine all documents carefully
before presentation to the paying bank to avoid any delay in receipt of payment. Commonly
found discrepancies between the letter of credit and supporting documents include:

       Letter of Credit has expired prior to presentation of draft.
       Bill of Lading evidences delivery prior to or after the date range stated in the credit.
       Stale dated documents.
      Changes included in the invoice not authorized in the credit.
      Inconsistent description of goods.
      Insurance document errors.
      Invoice amount not equal to draft amount.
      Ports of loading and destination not as specified in the credit.
      Description of merchandise is not as stated in credit.
      A document required by the credit is not presented.
      Documents are inconsistent as to general information such as volume, quality, etc.
      Names of documents not exact as described in the credit. Beneficiary information must
       be exact.
      Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the document may be
allowed if it can be done quickly while remaining in the control of the bank. If time is not a
factor, the exporter should request that the negotiating bank return the documents for corrections.

If there is not enough time to make corrections, the exporter should request that the negotiating
bank send the documents to the issuing bank on an approval basis or notify the issuing bank by
wire, outline the discrepancies, and request authority to pay. Payment cannot be made until all
parties have agreed to jointly waive the discrepancy.

Tips for Exporters

      Communicate with your customers in detail before they apply for letters of credit.
      Consider whether a confirmed letter of credit is needed.
      Ask for a copy of the application to be fax to you, so you can check for terms or
       conditions that may cause you problems in compliance.
      Upon first advice of the letter of credit, check that all its terms and conditions can be
       complied with within the prescribed time limits.
      Many presentations of documents run into problems with time- limits. You must be aware
       of at least three time constraints - the expiration date of the credit, the latest shipping date
       and the maximum time allowed between dispatch and presentation.
      If the letter of credit calls for documents supplied by third parties, make reasonable
       allowance for the time this may take to complete.
      After dispatch of the goods, check all the documents both against the terms of the credit
       and against each other for internal consistency.

3. Documentary Collection Services

Documentary Collection is a method of payment in which a bank acts as an agent for an importer
or exporter in order to facilitate the transfer of trade documents and payment.

In terms of document flow, Documentary Collection is similar to an LC transaction. However,
there is one key difference. With an LC, a bank guarantees the payment, but in a Documentary
Collection, a bank simply transfers the appropriate documents from seller to buyer without
guaranteeing payment. The buyer must be willing to accept payment risk in these transactions.

In a typical Documentary Collection, the exporter sends title, invoice and other documents
through its bank to an importer with instructions for collecting payment from that importer via a
correspondent bank in the importer's home country. Often, the seller will instruct its bank to
release the negotiable shipping documents to the buyer only when the buyer has either paid for
the goods in question or has accepted them with the promise to pay at a future date. In some
cases, the seller may opt to tier payment terms according to the value of the transaction.

Typically, Documentary Collection is used when two parties have developed a level of trust,
either because the buyer is a reputable company, is an affiliate or subsidiary of the seller or has a
favorable trading history with the seller. Documentary Collection also comes into play when
there is intense competition for business and sellers have a greed to drop their request for LCs and
accept more lenient payment terms.

Documentary Collection has emerged as a popular alternative to LCs because it is less
expensive, requires less documentary paperwork yet still provides exporters with complete
control over transaction documents until the buyer has paid or accepted a payment draft. For
importers, Documentary Collection eliminates the need to rap into their credit facilities.

However, there are drawbacks associated with Documentary Collection of which both importers
and exporters should be aware. Exporters may have to bear the cost of goods shipment, insurance
and agent fees if the importer refuses the shipment and does not pay. Also, the U.S. International
Chamber of Commerce's "Uniform Rules for Collection" only provide for the banks to act as
agents, and not underwriters of commercial risk; therefore, an exporter may have to resolve
matters directly with the importer.

Similarly, importers should know that because banks do not underwrite payment for
Documentary Collection, they are not obliged to examine documents for discrepancies as they do
with LCs. In these transactions, the importer is chiefly responsible for document review.

Still, in many situations, the benefits of using Documentary Collection more than outweigh its

4. Cash-in-Advance

Cash in advance is a term describing terms of purchase, when full payment for a good or service
is due before the merchandise is shipped. This presents the least risk to a seller while having the
most risk to the buyer. It is often combined with other terms such as Free On Board, which
require the buyer to take possession of the merchandise as soon as it is loaded onto
transportation, meaning the buyer assumes the financial risk if the shipment is lost or damaged
en route. In actual daily business these sort of terms are extremely rare unless the goods or
services are of phenomenal value and high fragility

Characteristics of Cash-in-Advance

Applicability Recommended for use in high- risk trade relationships or export markets, 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.


         • Payment before shipment

         • Eliminates risk of non-payment

       • May lose customers to competitors over payment terms

       • No additional earnings through financing operations

With the cash- in-advance payment method, the exporter can avoid credit risk or the risk of non-
payment 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, because it
tends to create cash- flow problems, and it often is not a competitive option for the exporter
especially when the buyer has other vendors to choose from. In addition, foreign buyers are often
concerned that the goods may not be sent if payment is made in advance. Exporters who insist on
cash- in-advance as their sole method of doing business may lose out to competitors who are
willing to offer more attractive payment terms.

Key Points

   • Full or significant partial payment is required, usually through a credit card or a bank or
   wire transfer, before the ownership of the goods is transferred.

    • Cash-in-advance, especially a wire transfer, is the most secure and favorable method of
   international trading for exporters and, consequently, the least secure and attractive method
   for importers. However, both the credit risk and the competitive landscape must be

   • Insisting on cash- in-advance could, ultimately, cause exporters to lose customers to
   competitors who are willing to offer more favorable payment terms to foreign buyers.

   • Creditworthy foreign buyers, who prefer greater security and better cash utilization, may
   find cashin-advance unacceptable and simply walk away from the deal.

Wire Transfer: Most Secure and Preferred Cas h-in-Advance Method

An international wire transfer is commonly used and is almost immediate. Exporters should
provide clear routing instructions to the importer when using this method, including the receiving
bank’s name and address, SWIFT (Society for Worldwide Interbank Financial
Telecommunication) address, and ABA (American Banking Association) number, as well as the
seller’s name and address, bank account title, and account number. This option is more costly to
the importer than other cash-in-advance options as the fee for an international wire transfer is
usually paid by the sender. W

Credit Card: A Viable Cash-in-Advance Method

Exporters who sell directly to foreign buyers may select credit cards as a viable cash-inadvance
option, especially for consumer goods or small transactions. Exporters should check with their
credit card companies for specific rules on international use of credit cards. The rules governing
international credit card transactions differ from those for domestic use. Because international
credit card transactions are typically placed using the Web, telephone, or fax, which facilitate
fraudulent transactions, proper precautions should be taken to determine the validity of
transactions before the goods are shipped. Although exporters must endure the fees charged by
credit card companies and take the risk of unfounded disputes, credit cards may help business
grow because of their convenience.

Payment by Check: A Less-Attractive Cash-in-Advance Method

Advance payment using an international check may result in a lengthy collection delay of several
weeks to months. Therefore, this method may defeat the original intention of receiving payment
before shipment. If the check is in U.S. dollars and drawn on a U.S. bank, the collection process
is the same as for any U.S. check. However, funds deposited by non-local checks, especially
those totaling more than $5,000 on any one day, may not become available for withdrawal for up
to 10 business days due to Regulation CC of the Federal Reserve (§ 229.13 (ii)). In addition, if
the check is in a foreign currency or drawn on a foreign bank, the collection process can become
more complicated and can significantly delay the availability of funds. Moreover, if shipment is
made before the check is collected, there is a risk that the check may be returned due to
insufficient funds in the buyer’s account or even because of a stop-payment order.

When to Use Cash-in-Advance Terms

• The importer is a new customer and/or has a less-established operating history.
• The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.

• The political and commercial risks of the importer’s home country are very high.

• The exporter’s product is unique, not available elsewhere, or in heavy demand.

• The exporter operates an Internet-based business where the acceptance of credit card payments
is a must to remain competitive.

Financial risks involved in international logistics management

Engaging in and financing exports involves a number common and well-known risks, which can
be addressed in the financing phase. While some of these risks relate broadly to international
trade, rather than specifically to export finance, certain financing options and payment
techniques do allow for the mitigation or optimization of such risks. These risks can be viewed in
four broad categories:

1. Commercial (Buyer) Risks
These relate to a foreign buyer's or supplier's performance under a commercial contract. These
include risks related to payment or performance according to the terms of the commercial
contract. Buyer risk includes the risk of devaluation of the importer's curre ncy, which may be so
severe that it results in default on a payment.

Managing Commercial (Buyer) Risk
Your assessment of foreign buyer risk may lead you to a variety of risk management strategies.
At the extreme, you may choose not to pursue business with a particular buyer. Alternatively,
some form of insurance scheme or secured payment option may be required. Or, the results of
your risk assessment may suggest that this is a fairly secure and low-risk trading partner, and that
a straightforward, usually less costly transaction structure may be acceptable.

2. Political or Country Risks
Refer to the risks of doing business in a particular country or region. These include the
possibility that import or export permits may be revoked, that war or civil unrest may break out,
or that the free flow of funds may be disrupted as a result of exchange controls, boycotts, or
international payment moratoriums. For exporters operating overseas, this category includes the
risk of expropriation by a foreign government.

Country risk assessments are most important for exporters dealing in higher-risk countries,
where risks or losses could result from political actions or circ umstances such as civil unrest,
war, economic crisis, or restrictions in the flow of foreign exchange or international payments.

Besides country risk assessments, you should also consider overall political and economic
stability, the strength of democratic institutions, protectionist tendencies, as well as basic
economic factors such as GDP growth, inflation, and unemployment.

Due to the wide variety of factors, and the complexity involved, country risk analysis is part art
and part science. Seek the opinions of experts at government agencies, banks, credit agencies and
other sources.

Managing Country Risk
As with buyer risk, the options related to country risk range from deciding not to export to a
particular area, to obtaining appropriate insurance and mitigation assistance from your export
finance service providers.

Exporters focusing their trade activities in the U.S. or Western Europe are more likely to be
concerned about commercial risk, whereas political and country risk is likely to take on more
urgency for companies trading in less familiar and less stable parts of the world.

3. Foreign Exchange Risk
This type of risk involves transactional exposure resulting from (sometimes volatile) fluctuations
in exchange (FX) rates. Significant currency rate fluctuations can have adverse effects on foreign
receivables and can easily affect profit margins.
Foreign exchange risk (or "FX risk") involves the fluctuation of the value of one currency
relative to another. This can occur due to a variety of factors and may happen over short periods
of time. When transactions are based on foreign currencies, these fluctuations can represent
significant risks (or opportunities), which must be well understood and appropriately managed.

There are three main kinds of risks with foreign currency exposure:

      Transaction exposure relates to the effect of FX fluctuations on transactions that have
       been initiated but not completed. This type of risk affects cash flow and occurs when, for
       example, an exporter holds a foreign-currency receivable and finds that the currency of
       the receivable has devalued against the US dollar.
      Translation exposure refers to the effects of foreign exchange fluctuations on financial
       reporting, for your taxes and financial statements. Foreign currency accounts may be
       "translated" or converted into US dollars using historical FX rates and/or current rates,
       thereby generating paper gains or losses for the exporter.
      Economic exposure relates to the impact of economic conditions on future cash flow. A
       Canadian exporter may be severely affected by a significant appreciation of the Canadian
       dollar against foreign currencies, given that the relative cost of the goods increases in the
       foreign market.

Managing FX Risk
A variety of tools and techniques are available to manage and optimize foreign currency
exposure. The most common include:

      Forward contracts are contracts with commercial banks, in which an exporter agrees to
       sell a fixed amount of foreign currency at a fixed price, at a mutually agreed future date.
       Such contracts eliminate the uncertainty associated with FX fluctuations. But the exporter
       also does not benefit from any favourable "upside" in the foreign currency rates.
       Forwards are entered into independently of the export contract.
       Exposure netting relates to the practice of matching foreign currency inflows with
        outflows in the same currency, to eliminate or "net out" the exposure. Depending on the
        nature of the transactions and the financial facilities used, traders may achieve near-
        perfect netting.
       Curre ncy options are contracts that confer the right (but not the obligation) to buy or sell
        foreign currency at a specified price, within a defined time period. Unlike forward
        contracts, options offer the possibility for exporters to benefit from favourable
        fluctuations in FX rates. They are also useful in the event that an exporter wishes to
        mitigate a potential (or contingent) FX liability.

4. Other Risks
Other risks Canadian exporters face includes the risk of being the target of fraud, as well as the
possibility of loss or damage of exported merchandise while in transit overseas. The risks related
to legal jurisdictions governing the terms of an export contract are critical in the event of a
disagreement or dispute. These risks are best addressed up front by the trading partners and their
legal or trade advisors.

Certain tools and techniques of export finance, such as the use of payment terms which specify
remittance in a U.S. or Canadian jurisdiction, can assist in managing such risks and optimizing
the likelihood of a fair resolution to a dispute.

ILM –Risk Mitigation

1. Direct Credit
Export Credit Agencies support exports through the provision of direct credits to either the
importer or the exporter
•Importer: a buyer credit is provided to the importer to purchase goods
•Exporter: makes a deferred payment sale; insurance is used to protect the seller or bank
2. Guarantees
–Bid bond (tender guarantee): protects against exporter’s unrealistic bid or failure to execute the
contract after winning the bid
–Performance bond: guarantees exporter’s performance after a contract is signed
–Advance payment guarantee (letter of indemnity): in the case where an importer advances
funds, guarantees a refund if exporter does not perform
–Standby letter of credit: issuing bank promises to pay exporter on behalf of importer

3. Insurance
–Transportation insurance
•Covers goods during transport; degree of coverage varies
–Credit Insurance
•Protects against buyer insolvency or protracted defaults and/or political risks
–Seller non-compliance (credit insurance)
•Covers advance payment risk
–Foreign exchange risk insurance
•Provides a hedge against foreign exchange risk

4. Export Finance -Instruments used to Hedge Price Risk
–Stabilization programs and funds
–Timing of purchase/sale
–Fixed price long-term contracts
–Forward contracts
       •Primarily trade-related
       •Can help in obtaining export financing
–Futures or options
       •Futures contracts can be used to obtain export financing
–Use of OTC markets
       •Primarily trade-related
      •Often used to secure loan repayment
–Commodity- linked loans bonds
      •Primarily used to obtain financing

          1. www.intracen.org/tfs/docs/glossary/ee.htm

          2. www.edc.ca/english/exportfinanceguide/efg_sub4_12107.htm

          3. www.austrade.gov.au/.../austrade-business-and-finance.pdf.aspx

          4. www.importexporthelp.com/export-financing.htm

          5. www.allbusiness.com/trade-development/...finance.../5475667-1.html

          6. www.tradeport.org/tutorial/financing/index.html

          7. www.oecd.org/.../0,3343,en_39048427_39049358_41368988_1_1_1_1,0

          8. www.euromoneyseminars.com/.../10th-Anniversary-Global-Export-

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