Exporters expect to receive payment for goods and services provided to overseas buyers and all transactions involve a degree of risk either for buyers or sellers or both.
What is financially risky for exporters will be least risky for importers and vice-versa. Negotiations will inevitably favour the party with stronger bargaining power and the end result will form an integral part of the contract of sale.
The following options are available to exporters and importers:
Where an importer is required to pay for merchandise prior to shipment. High risk for importers/low risk for exporters. This is common where buyers and sellers do not have a close relationship or where there may be adverse credit issues
Where the exporter ships merchandise and bills the importer at a later date. High risk for exporters/low risk for importers. This is used where buyer and seller have a high degree of trust e.g. between subsidiaries of international companies.
Between these two extremes are:
Where a bank acts as an intermediary between buyer and seller without accepting financial risk. It is commonly used when there is an ongoing business relationship between the two parties.
Where the importer’s bank issues a document stating that the bank will pay the exporter when the terms of the document are fulfilled. Typically used when an importer’s credit rating is questionable, when the exporter needs finance and when market regulations require them
they may be irrevocable (changes may only be made where both buyer/seller agree), revocable (which may be changed without the exporter’s agreement) or confirmed (payment may be made by a third bank in the event of default)
While these do not entirely eliminate the risk of non-payment, they do provide a measure of confidence to the exporter.
