In export-import business, your buyer is located in different places and the seller in different places and different countries. So when both of them are located in different places, different country, it becomes sometimes very difficult for you to procure the order. Now, in order to procure the order in the most effective way you need to formulate, you need to develop the terms of payments as favorable to the buyer.
The terms of payments are favorable to the buyer, the chances are you’d be able to clean the order. The terms of payments are determine by number of factures, for example, exchange controls regulation, terms of trade practices, financial position of buyers, bargaining instinct of buyer and seller. It depends that how you are going to manage the terms of payments so that one party is being attracted toward your order and you are able to fulfill the export consignment possessors. There are different modes of terms of payments. You have Advance payment, Documentary credit, Consigment basic, Periodical settlement of payment.
Foreign Trade Financial
In the process of trade, exporter exports the goods to importer and in lien of that, exporter receives the payment. That must be same as well to exporter that he’ll receive the payments, that must be as same as well importer that he’ll receive the goods in order recording to his specifications. The quantity of goods, the quality of goods must deli with its specifications. So these are very important issues. The importance of document export is very much import, its very material, what to do with the modes of payments and how should be there difference of sources of finance export. So these all are very important.
Letter of Credit
Let’s talk about the first of all documents, letter of credit. This is the most important document in the foreign trade. Letter of credit is a document which is showing the importer’s bank making promises to pay to exporter. The contents of L/C are:
· A specific amount, how much amount that should be paid
· Within a specific maturity, how long it will be delivered
· Subject to matching of delivery to the order, the quality and the quantity should not be different.
· For that issue of L/C, the importer’s bank charges some amount of fee from the importer.
It’s a Document mitigating credit risk of the importer, the Importer’s bank issues the L/C, that’s why the credit risk, which is always there, for the exporter that is the mitigation.
- The importer makes order,request to its banker to issue L/C
- The importer’s bank issues the L/C and deliver L/C to exporter’s bank, passes on L/C to export
- Exporter ships goods and passes on L/C to its bankers. The latter deliver L/C to importer’s bank
- Importer’s bank makes payment and debits the account of the importer.
Variants of L/C
- Clean and Documentary
Sometime it’s clean L/C, almost said documentary L/C. Documentary L/C means that the exporter gets the L/C from the importer’s bank by its own banking, then exports the goods. It deposits that L/C by its own banker along with other documents. So the documentary L/C means when the L/C is accompanied by the related documents and then L/C is passed to the importer’s bank and everything is done. In some cases, the exporter knows the importer very well and the exporter is sure that the payment must be made, so in that case, the exporter sends the L/C directly to the importer without attaching any document, this L/C called Clean L/C.
- Revocable and irrevocable
Irrevocable L/C means that when the importer’s bank issues the L/C it can’t make changes later on. It can’t cancel the L/C later on. But if the importer’s bank makes changes on the L/C, in the terms of the L/C, if it cancel L/C later on, that is revocable L/C.
- Confirmed and unconfirmed by exporter
Normally, the importer’s bank sends L/C to the exporter’s bank and the exporter’s bank confirms it and passes it on to exporter. But sometimes when the exporter doesn’t know much about importer, and it lack confidence in the importer and the exporter get the L/C additionally confirmed by some other bank also. So when the L/C confirmed by the exporter’s bank and also some other bank, double confirmed, that is confirmed L/C. in this case the exporter is more assured by the importer.
- Fixed and revolving
Fixed L/C is when the transaction of the exporter and importer is only once or twice, the L/C will be prepared and issued by the importer’s bank for a particular transaction. But if it is a continual transaction, the L/C is issued by the importer’s bank passes to exporter’s bank, back to the Importer’s back again and the same L/C is used for second, third and soon transactions, then it’s called revolving L/C.
- Transferable and back to back
In some cases the exporter and the producer is same person, in some other cases the producer is different and the producer export some goods by some exporters. So if the L/C is issued by the name of these exporters and there’s no transfer clause in the L/C, so the amount located to the exporter not to the producer. That’s why the L/C should have terms of transferable, so it’s called Transferable L/C. But some L/C issued in terms the name of suppliers too, it’s called back to back L/C.
- Red Clause
Red clause L/C is kind of L/C that give right to the exporter to get some funds form bank when they get lack of money for producing the goods.
Modes Of Payment
- Cash in advance
It’s not done in normal cases, it’s done when the exporter doesn’t know much about the importer. The exporter is not assured that the importer will make the payment.
- Payment under consignment sale
The importer will make the payment when the goods are all sold, he won’t pay the unsold goods.
- Payment through draft
Draft is a bill of exchange, exporter draw the draft and sends it to importer and then the importer accept it
· Sight draft and time draft
Time draft, where the importer accepts the draft and promises to pay the amount by specific time, may be two months or three months. And the sight draft is when the importer accepts the draft and makes the payment.
· Clean draft and documentary draft
It’s just like L/C, when the draft is accompanied by some related documents, it’s called documentary draft. And if clean draft, it’s not necessary to accompany draft with documents.
- Payment Through L/C
The importer’s bank issued L/C by importer’s request, then the importer’s bank sends the L/C to the exporter’s bank and the importer get the goods with its specification and the importer’s bank pay to the exporter’s bank and pay it to the exporter.
- Open account
There’s common relation between exporter and importer and the transaction is made continually. So the importer makes a periodic payment and so does the exporter makes a periodic export.
