Exporters must arrange for a method of payment and should consider the risk liability, who holds the market power, the level of trust in the relationship/outcome and an examination of the final export product.
Cash in Advance
Payment is to be made up front in cash. Cash in Advance is common when the product is in great demand, when the buyer has poor credit or when the importer's country is unstable.
Letters of Credit
Document issued by bank, usually at the request of a buyer, obligating the bank to honor the seller's draft.
This is the most common method of payment for international exporting.
There are two different forms of letter of credit:
- Sight draft - an exporter's bank requests payment directly from the importer's to automatically transfer funds.
- Time draft - an extension of credit to the importer. The importer can defer payment for a period of time. It is the bank's responsibility for collection and also their reputation on whether or not the payment will be made. There are also site and time versions of drafts for collection. This entails payment on maturity of draft or upon its presentation.
Seller ships the products with an invoice and waits for payment. This is the cheapest method of payment, but also the riskiest. This method is most common and makes the most sense for intra-company shipments
Companies may choose to finance their efforts through internal funding from profits or externally through investors, banks, and governments. There are two kinds of financing available for exporting. Working capital loans acquire supplies, develop overseas markets, or build inventories. Transaction loans support specific transactions. In order to acquire these loans, an exporter needs export credit insurance before a bank will provide any type of financing. Companies unable to secure financing from banks can turn to other financing options.
All of these methods of financing can be effective but you must analyze your exporting process and the importing country individually to determine the best fit for your company.
- Boutiques: Private lenders called boutiques will back export deals deemed too risky by bankers. Although they appear to be an easy solution, they charge high service fees.
- Forfaiting: This is a sale by an exporter of a receivable to a forfait company for a discounted payment. When dealing with some countries, exporters may have to fund the importer, especially in developing countries where interest rates are devastatingly high. If you can offer terms beyond 180 days, it may increase your business prospects.
(e.g., Check out Mezra.com)
- Factoring: This is the sale of export receivables to a factoring firm, which will undertake collections. A company that handles factoring will transfer the invoice into the importer's currency, pay the exporter, and then collect the payment from the importer. Factoring is mostly used in developed countries where the risk is low and collection is high.
Letters of Credit
Purpose/Content: Provides a quick guide to letters of credit with simple definitions of commonly used terminology and outlines of the steps. Offers software for sale on-line that assists the process in more detail.
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Costs: Free, except software, which must be purchased
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