International trade presents a spectrum of risk, causing uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer). To exporters, any sale is a gift until payment is received.
Therefore, the exporter wants payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer. To importers, any payment is a donation until the goods are received. Therefore, the importer wants 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 make payment to the exporter.

 Cash in Advance/Prepayment occurs when a buyer sends payment in the agreed currency and through agreed method to a seller before the product is manufactured and/or shipped. Upon receipt of payment this seller then ships the goods and all the necessary shipping and commercial documents directly to the buyer. .

Goods Available to Buyer -After payment is received. product.). through the agreed upon method (cash. check. wire transfer.   Risks to Seller -Product is manufactured and never paid for. quality. shipping method). Time of Payment -Prior to manufacturing and/or shipping.  . etc. credit card. Risks to Buyer -Seller does not ship per the order (quantity.

May lose customers to competitors over payment terms No additional earnings through financing operations  . Payment before shipment Eliminates risk of non-payment  Cons.Pros .

    The importer is a new customer and/or has a less-established operating history. The exporter’s product is unique. The political and commercial risks of the importer’s home country are very high. not available elsewhere. . or unverifiable. unsatisfactory. The importer’s creditworthiness is doubtful. or in heavy demand.

The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped. . Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance. the use of letters of credit has become a very important aspect of international trade. differing laws in each country and difficulty in knowing each party personally.

usually the exporter.      Applicant: The party applying for the letter of credit. usually expressed as a maximum amount. of the credit defined in a specific currency. Terms: The requirements. The Issuing Bank: The bank that issues the letter of credit and assumes the obligation to make payment to the beneficiary. including documents. Amount: The sum of money. Expiry: The final date for the beneficiary to present against the credit. . Beneficiary: The party in whose favor the letter of credit is issued. that must be met for the collection of the credit. usually the exporter in a grain transaction. usually the importer in a grain transaction.

 Pros . financing and risk mitigation options available  Cons . Labor intensive process . Payment made after shipment . A variety of payment. Relatively expensive method in terms of transaction costs .

along with instructions for payment. which sends documents to the importer’s bank (collecting bank).Documentary collection is a transaction whereby the exporter entrusts the collection of payment to the exporter’s bank (remitting bank). Funds are received from the importer and remitted to the exporter through the banks in exchange for those documents. .

 Bank assistance in obtaining payment . and less costly than LCs .Pros .  The process is simple.  Banks do not verify the accuracy of the documents . fast.  Banks’ role is limited and they do not guarantee payment . Cons .

60 or 90 days. An open account transaction in international trade is a sale where the goods are shipped and delivered before payment is due. Obviously. which is typically in 30. this option is advantageous to the importer in terms of cash flow and cost. but it is consequently a risky option for an exporter. .. Because of intense competition in export markets. It is possible to substantially mitigate the risk of nonpayment associated with open account trade by using trade finance techniques such as export credit insurance and factoring.

   The goods. which is usually in 30. The exporter should be absolutely confident that the importer will accept shipment and pay at the agreed time and that the importing country is commercially and politically secure. along with all the necessary documents. are shipped directly to the importer who has agreed to pay the exporter’s invoice at a specified date. 60 or 90 days. . Open account terms may help win customers in competitive markets and may be used with one or more of the appropriate trade finance techniques that mitigate the risk of non-payment.

Pros . Boost competitiveness in the global market . Help establish and maintain a successful trade relationship Cons . Significant exposure to the risk of non-payment . Additional costs associated with risk mitigation measures .

An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives. . and sells the goods for the exporter who retains title to the goods until they are sold. manages. Consignment in international trade is a variation of the open account method of payment in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. Payment to the exporter is required only for those items sold.

thereby making it possible to keep selling prices in the local market competitive. Partnership with a reputable and trustworthy foreign distributor or a third-party logistics provider is a must for success. . Consignment can also help exporters reduce the direct costs of storing and managing inventory.      Payment is sent to the exporter only after the goods have been sold by the foreign distributor. Exporting on consignment can help exporters enter new markets and increase sales in competitive environments on the basis of better availability and faster delivery of goods. The importing country should be commercially and politically secure. Appropriate insurance should be in place to mitigate the risk of non-payment as well as to cover consigned goods in transit or in possession of a foreign distributor.

    Pros . Exporter is not guaranteed payment . Help reduce the direct costs of storing and managing inventory Cons . Help enhance export competitiveness on the basis of greater availability and faster delivery of goods . Additional costs associated with risk mitigation measures .

    . The Forfeiter – One who takes the responsibility of collection of debts The importer – One who has to pay the debt.In forfeiting. He is also referred as client. The amount advanced is always without recourse to the exporter and is less than the invoice or note amount as it is discounted by the bank. In the process of forfeiting. Also known as debtor. a bank advances cash to an exporter against the invoices or promissory notes guaranteed by the importer’s bank. Also known as guarantor of the importer. The bank – One who makes payment on maturity to the forfeiter on presentation of bill of exchange. four parties are involved which are: The Exporter – One who immediately converts the credit into cash.

Exporter faces no administration and collection problems It provides finance for counter trade. It does not involve any risk on account of foreign exchange fluctuations to exporter between the insurance date and maturity of paper.    Forfeiting enable a broad range of instrument in use like promissory notes. bills of exchange etc. etc .

 Eliminates the risk of non-payment by foreign buyers .  Limited to medium and long-term transactions .Pros .  Offers strong capabilities in emerging and developing markets Cons .  Cost is often higher than commercial lender financing .

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