Payment and Finance
Doing business internationally certainly involves additional risk. Every exporter should be aware of the different types of risks, as well as be able to analyze and minimize them as much as possible. Finally, knowing the pros/cons of the different types of payment methods allows an exporter to make an informed decision on the preferred method of payment.
Determining the type of payment may be outlined in your contract if it is an ongoing relationship with an international partner (see the section on contracts [link]). The following types of payments are also applicable for single sales.
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Types of Payments
Cash in Advance
Payment in full is received before goods are shipped. This is the most secure type of payment for exporters, but least secure and least attractive for the buyer. Although common, this can cause exporters to lose potential market share as other exporters who offer better terms for the buyer.
However, this is a common option for first-time purchases before a relationship is established, when a country is risky politically, or with an internet-based business where using up front credit card payments is common.
Letters of Credit
This is one of the most secure tools for international exports. An LC is a commitment by a bank on the behalf of the buyer that payment will be made if the terms and conditions of the LC are met. A buyer pays their bank for this service and pays the exporter when the goods are shipped, not necessarily received. This is useful when credit information about the buyer is hard to obtain, but the exporter trusts the buyers bank. It is also useful when dealing with countries that are politically unstable. The bank as an independent third party and makes sure the seller will get paid by using what is similar to an escrow account. LCs can also be used in the reverse, so that buyer is protected to make sure the exporter delivers their product. This method requires a fee, but helps to reduce risk for the exporter. LCs can be easily used for single transactions and are good options for the first transaction between two parties.
These are similar to Letters-of-Credit but involve a little more risk on the part of the exporter and are less expensive and less complicated. The exporter and importers banks act as intermediaries between the two parties. Importers generally are not required to pay for the goods before shipment and do not obtain the title for the goods until they are received. This method can be used after a relationship is established between the two parties and there is a degree of trust between them. Importers may also prefer to use this method as there is less cost and less risk for them as opposed to a Letter-of-Credit.
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. This option is the most advantageous to the importer, but the highest-risk for the exporter. Global competition for sales of certain goods can give buyers the advantage and exporters may loose sales if they don’t offer this sales term.
There are a few programs and techniques to help exporters to be able to offer Open Account payment:
Export Credit Insurance
Export credit insurance (ECI) protects an exporter of products and services against the risk of non-payment by a foreign buyer.
ExIm Bank offers some of the best rates and coverage. Contact Sandra Donzella at 858-467*7035 or email@example.com for more information.
Export Working Capital Financing
EWC helps exporters purchase goods and services if they lack the cash on hand necessary to do their business, such as materials, labor, and inventory. These loans are through private banks. Government guarantees can be sought through the SBA loan program or ExIm bank to help facilitate these loans.
Government-Guaranteed Export Working Capital Programs
Small or new business may not be able to get private bank loans. The SBA and the Ex–Im Bank offer loan guarantees to participating lenders for making export loans to U.S. businesses. Visit the SBA loan page of the Ex-Im loan page for more information.
Export factoring is a financial package that combines export working capital financing, credit protection, foreign accounts receivable bookkeeping, and collectionservices. Export factoring is an agreement between the bank and exporter, in which the bank purchases the exporter’s short-term foreign accounts receivable for cash at a discount from the face value. The bank assumes the risk of collection from the buyer, allowing the exporter to offer open accounts, improvs liquidity, and boosting competitiveness in the global marketplace.
Types of Risks to Consider
Commercial Risk: Match payment terms with identified risk. The higher the risk, the greater the use of secured terms. There is no credit risk associated with a transaction if no credit is extended. For example, if the payment terms are cash in advance or a credit card is used, the invoice is paid prior to shipping and no risk is created.
Political Risk: It’s the inability of your customer to pay the receivable in full and on time due to government action. The level political risk is generally associated with the political stability and outlook of the government of the foreign buyer. Examples include the risk of war, government actions or significant economic shocks that could affect exporters such as a delay of payment. Assessing political risk should be done through research on the government and political environment of the foreign buyer. There are only two ways to minimize political risk. If the risk is high, the payment method should be adjusted accordingly. Usually, prepayment is the best way to avoid political risk. If prepayment is not acceptable, a second option is export credit insurance. For example, Ex-Im Bank offers programs other than its small business policy that can be applied to a specific transaction.
Foreign Exchange Risk (FX Risk): It defined as a change in the foreign exchange rate from the time the sales price was established and accepted to when payment is made. Whenever the exchange rate changes, it impacts either the seller or the buyer. The company’s international strategy must be flexible enough to deal with long-term foreign exchange movement. Company can diversify sales markets and potential through sourcing and manufacturing locations.
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