With export financing, the exporter can go to his bank with the export contract and ask for a loan or an overdraft. The bank will take into consideration the exporting companys financial status and its ability to carry out the order. The loan will be paid back with interest.
With factoring, the exporter sells his invoice for less than the total amount to the factor, which is usually a group of banks or insurance companies or private factoring companies. The factor then collects the full amount from the debtor (the importer). Depending on the terms of the contract the factor may operate with or without recourse.
Leasing refers to the ‘rental of capital goods and consumer durables such as commercial vehicles, IT systems and construction plant equipment. The international leasing company, which may be a bank or other financial institution, pays the exporting company in advance for the goods. The ownership of the goods then passes to the leasing company which leases the goods to the importer on a medium or long-term agreement.
In international trade payment, by cheque usually occurs in small orders. The exporter should wait until the cheque has been cleared before shipping the goods. International clearing of cheques usually takes three to four weeks. Many banks now offer a lock box service for payments made by cheque. Cheques are sent to a post office box number, collected by a bank in the importers country, which transfers the amount to the exporters account in his own country. The lock box system cuts out the lengthy procedures of posting cheques to international destinations and clearing international cheques.
Credit cards are issued by companies that guarantee payment for the goods and services that the cardholder buys. The cost is charged to the cardholders account and paid the following month, when a statement that lists all the transactions is sent to the cardholder. Because of the serious risk of fraud, credit cards are only used in international trade for small orders.
A bank transfer is an irrevocable and unconditional order of payment issued by the debtors bank to a correspondent bank in the creditors country.
The money is taken from the debtors bank account and transferred to the creditors account.
Transfer by SWIFT (Society for Worldwide Interbank Financial Telecommunications) is the most popular option for international money transfers. SWIFT is an non-profit organisation and more than 7,125 financial institutes in 192 countries subscribe to it. The computer system employed by SWIFT allows banks to make same-day
international exchanges. Banks in developing countries that are not part of the SWIFT network transmit this kind of information by telex, which, of course, takes more time.
Bill of Exchange
The Bill of Exchange, or bank draft, is a document that orders a bank to pay a sum of money on demand or on a certain date to the company specified. There are three parties involved:
the drawer – the company that orders the draft;
the drawee – the company that receives the draft and who will pay;
the payee the person to whom the payment is made, usually the same as the drawer.
Cash with order (CWO)
Cash With Order is the safest method of payment for the exporter. The importer pays for the goods when placing the order and then waits for the exporter to fill the order and ship the goods. Problems may arise if the goods that are delivered are late or do not correspond to the description agreed in the contract of sale. CWO is only used for small purchases
and when the goods are built to order.
Cash on delivery (COD)
With Cash On Delivery the goods are delivered to the importer at the exporters expense, together with an invoice. The importer pays the invoice when the goods arrive. COD is quite widely used in trade within the EU where goods are delivered by lorry. COD saves time as it does not involve lengthy procedures involving banks located in different countries. It does, however, involve some risk for the exporter, who, after he has delivered the goods, may discover that the payment has not effectively been made.
The Open Account is the least secure means of foreign sales for the exporter and is usually reserved for regular, reliable customers. The exporter delivers the goods without any pre-payment or
payment security. The importer has immediate access to the goods and can control repayment, which is usually made 30 to 120 days after the invoice date. In the case of repeated delivery of goods the customer will receive a statement of account containing a list of all the transactions that have taken
place during the period.
Documentary or Cash Against Documents (CAD)
In a case where the exporter is confident about the relationship with the buyer,
documentary collection can provide a good solution. There are two types:
Documents against Payment (D/P).
Documents against Acceptance (D/A).
The D/P procedure operates as follows:
the exporter sends his bank the shipping documents, which show ownership of the merchandise, and a Bill of Exchange at sight, which must be paid immediately;
the bank sends the documents to the importers bank;
D/A involves a Bill of Exchange on which payment is due at a future date. The buyer accepts the exporters Bill of Exchange and the documents are handed over. It operates as follows:
a Bill of Exchange is drawn by the exporter on the importer, payable at a future date. The bill accompanies the shipping documents
the shipping documents are released as soon as the importer accepts the Bill of Exchange. The importer now has access to the goods.
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