Payment methods and Finance in International Trade

In International Trade there are 4 main ways for Importers to make payments to Exporters: Advance Payment, Open Account Trading, Documentary Credits, Documentary Collections.
Advance Payment
The importer sends his payment to the overseas exporter before the goods are shipped. This method is used when (a) the importer is unable or unwilling to open a Documentary Credit (b) the importer has a good cash position and negotiates a big cash discount or (c) the negotiating power of the exporter is very strong.
The importer must be confident of  the reliability of the exporter and the exporter’s country.
Open Account Trading
This is basically payment in arrears, the opposite of payment in advance and covers a regular flow of shipments. The importer enters into an agreement with the exporter to pay, for example,  at the end of each month or one month after each shipment. There is usually a long-standing or regular business relationship between the two parties.
 The exporter must be confident of the reliability of the importer and the stability of the importer’s country. Usually exporters protect themselves against these risks through exports  credit protection insurance coverage.
Documentary Credit
In the previous two methods, there is an issue of trust and risk for both importer and exporter. In fact, trade is very difficult between companies who do not know each other.
In this method, banks act as a trustworthy intermediary between importer and exporter. By issuing a documentary credit the importer’s bank guarantees payment to the exporter if he presents the correct documents. The importer pay for the documents, but not until the bank receives them. Furthermore, the bank is ready to provide finance to support importer and exporter fulfill their trade obligations.
Documentary Collections
In this case no documentary credit is issued and the bank is not involved in any undertaking to pay the exporter. The bank acts as an agent only.
The collection cycle starts when the exporter, having shipped the goods and obtained the necessary documents, presents the documents together with his instructions to his bank. The bank will send these to its correspondent bank in the importer’s country for payment.
The importer is in a position to examine the documents before paying for them. The exporter does  not have a bank’s guarantee, however, he may have a control over the goods through the collecting bank.
Finance
Often, the Importer, or the Exporter will need finance to allow completion of a deal. For example, the importer may wish to pay the imported goods after he has had a chance to sell some of them. On the other hand the exporter may need finance to buy the raw materials to produce the goods he is selling. Once a bank has decided it will finance a transaction, it may be able to use the various documents which exist in International Trade to secure the financing.
Exporters can be financed by
Pre-Shipment Finance, for a specific order or shipment. These loans support the exporter to purchase raw materials to produce the goods.
Post-Shipment Finance, where the bank is prepared to purchase or discount bills of exchange after shipment but before payment by the importer. These loans represent an advance to the exporter against the bill of exchange (evidencing the goods are shipped), pending payment from the importer.
Overdraft, to cover various expenses.
Importers can be financed by Import Loans (relating to specific shipments) and Overdrafts.
 
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