Terms and methods of payment in foreign trade (on credit)

Speaking on this topic first of all I would like to tell about risks in international trade concerning exporters & importers – both sides face risks in an export transaction, because there is always the possibility that the other side may not fulfill the contract.

So risks for the exporters:

1. the risk of buyer default
2. the customers might not pay in full for the goods:

-                the importers might go bankrupt

-                a war might start

-                importers' government might decide to ban trade with the exporting country

-                importers' government might decide to ban imports of certain commodities

1. the importers might run into difficulties getting the foreign exchange to pay for the goods
2. the importers are not reliable & simply refuse to pay the agreed amount of money

Risks for the importers:

1. the goods will be delayed & they will only receive them a long time after paying for them, because of:

-                port congestion

-                port strikes

1. delays in fulfillment of orders by exporters & difficult Customs clearance in the importing country can cause loss of business
2. the wrong goods might be send

As we see there are a lot of different risks. & many of that risk are reduced by the work of the banks.  They provide several services which give security to exporters & importers:

1. the risk of buyer default or non-delivery by exporters is removed by the method of payment against shipping documents.
2. exporters' banks provide information about the financial reliability of their customers
3. banks help arrange buyer credit or finance for the sellers (without this a lot of trade would not take place at all)
4. the risks of financial lost because of a change in exchange rate can be avoided with the help of a bank, by buying the foreign exchange on the forward exchange market

& now I would like to move to the main part of our topic – terms of payment. We must admit that the terms of payment are an integral part of contract in international trade. There are different methods of payment in foreign trade:

1. in cash
2. on credit.

I'd like to speak about methods of payment on credit. There four different methods:

1. By drafts (by Bills of Exchange – B/E), which is the most popular terms of payment on credit. A Bill of Exchange is a signed documents, such as a cheque, that orders a person or an organization, such as a bank, to pay a fixed sum of money on demand or on certain date to the person specified. It is a document that can be exchanged for goods, money, i.e. it is a negotiable instrument like cheques or banknotes and can be a subject of the deal.

1. By drafts (by Bills of Exchange – B/E), which is the most popular terms of payment on credit. A Bill of Exchange is a signed documents, such as a cheque, that orders a person or an organization, such as a bank, to pay a fixed sum of money on demand or on certain date to the person specified. It is a document that can be exchanged for goods, money, i.e. it is a negotiable instrument like cheques or banknotes and can be a subject of the deal.

There are various types of bills of exchange:

-         accommodation B/E: a bill that is signed by someone who promises to pay it to help another person to raise money. A person signing the accommodation bill is called the accommodation party, i.e. a person with a good financial reputation who signs a bill to make it easier to exchange; sometimes accommodation bills are called 'kites', 'windbills' or 'windmills'.

-         discounted B/E: bill bought at a reduced price before it is due for payment;

-         documentary B/E: a bill attached to shipping documents such as bills of lading, invoices, etc.;

-         documents-against-acceptance B/E [D/A, D/A bill]: a bill sent by an exporter with other shipping documents to an agent who will not release the documents until the bill of exchange has been signed (accepted) by the person receiving the goods; this is used when the bill of exchange is a period bill and must be paid by a specified date;

-         document-against-payments B/E [cash-against-documents]: a bill sent by an exporter with other shipping documents to an agent who will not release the documents until the bill has been signed (accepted) by the person receiving the goods; this is used when the bill of exchange is a sight bill and must be paid immediately;

-         endorsed B/E: a bill signed on the back, that makes it payable to someone else.

-         foreign B/E

-         inland B/E

-         period/ term B/E: must be paid on a specific date

-         short B/E: must be paid within 10 days

-         sight B/E: immediate payment

-         time B/E: must be paid within several days after being signed

-         trade B/E: a bill that is used to pay for goods.

 

Source : articlesbase