Trade financing can be very complicated to navigate and many times require a certain level of expertise, let us help you close your transaction successfully!
INVESTMENT BANKING FIRM
Phoenix Group provides international trade financing for soft commodities and mineral assets. Let us facilitate your next import/export trade deal. We also provide forfaiting and other monetization of instruments such as SBLC, LC and BG already held.
We can also provide trade instruments to facilitate your transaction such as timber, oil, diamonds and gold. Our top 10 world bank partners only facilitate legitimate transaction. We facilitate all due diligence to meet OFAC and Anti-money laundering requirements.
Methods of Payment in International Trade
To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms supported by the appropriate payment methods. Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer. As shown in the below Payment Risk Diagram, there are five primary methods of payment for international transactions. During or before contract negotiations, you should consider as an exporter which payment method is mutually desirable for you and the importer. In addition, the exporter should become familiar with shipping documents that are required by the importer to take possession of goods upon shipment arrival at the destination country. Examples of such documents include a commercial invoice, a packing and/or weight certificate, an insurance certificate, a certificate of origin, and bills of lading. No matter which payment method is used, the exporter and importer must understand what shipping documents will be required to avoid potential problems with their transaction.
Payment Risk Diagram
Key Points
International trade presents a spectrum of risk, which causes uncertainty over the timing of payments between the exporter (seller) and importer (foreign buyer).
For exporters, any sale is a gift until payment is received.
Therefore, exporters want to receive payment as soon as possible, preferably as soon as an order is placed or before the goods are sent to the importer.
For importers, any payment is a donation until the goods are received.
Therefore, importers want to receive the goods as soon as possible but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to pay the exporter.
No matter which payment method is used, the exporter must understand what shipping documents will be required by the importer to take possession of goods upon shipment arrival at the destination country.
Cash-in-Advance
With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the goods are shipped. For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. Cross-border escrow services may be a cash-in-advance alternative for exporters and their importers who demand assurance that the goods will be sent in exchange for advance payment. However, requiring payment in advance is the least attractive option for the importer because it creates unfavorable cash flow for their business. Importers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms.
Letters of Credit
Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the importer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The importer establishes credit and pays their bank to render this service. An LC is useful when reliable credit information about an importer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the importer’s bank and, if not, the exporter can ask for the LC to be confirmed by a second bank is satisfied with. An LC also protects the importer since no payment obligation arises until documents evidencing that the goods have been shipped as promised are presented.
Documentary Collections
A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to the exporter’s bank, which sends the required shipping documents to the importer’s bank, with instructions to release the documents to the importer in exchange for payment or the importer’s signed promise to pay on a specified future date. Funds are received from the importer and remitted to the exporter through the banks involved in the collection. D/Cs involve using a draft that requires the importer to pay the face amount either at sight or on a specified date. Although banks do act as facilitators for their clients, D/Cs offer no verification process and limited recourse in the event of non-payment. D/Cs are generally less expensive than LCs.
Open Account
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. Because of intense competition in export markets, importers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose sales to their competitors. Exporters can offer competitive open account terms while substantially mitigating the risk of non-payment by using one or more of the appropriate trade finance techniques covered later in this Guide.
Consignment
Consignment in international trade is a variation of open account in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of an independent distributor or agent. However, consignment helps exporters become more competitive on the basis of better availability and faster delivery of goods. Selling on consignment can also help exporters outsource the burden of storing and managing inventory. The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance should be in place to cover consigned goods in transit or in possession of a foreign distributor as well as to mitigate potential financial losses. In addition, all details should be spelled out in the contract, and be enforceable in the country of both exporter and importer.