International Payment Tools
Table of contents
II. Common Payment Instruments
1. Cash in advance
2. Letter of credit
3. Documentary collection
4. Open account or credit
5. Countertrade or Barter
6.Other Payment Methods
III. Resources and Annex
Annex :Common Discrepancies Which Can Lead To Non-payment of a Commercial Letter of Credit
Figure 1 - Letter of Credit Diagram
Figure 2 - International Payment Instruments Comparison Chart
Many enterprises, even those that operate on a global scale are sometimes unfamiliar with the legal controls, cultural expectations, business practices, and regulatory mechanisms of other countries. This is especially true for emerging agro-enterprises in developing countries. Today, international trading partners can conduct business never having even met or spoken with each other. Inadequate knowledge of the options that are available increases transactional uncertainty and the possibility of loss. In the presence of such uncertainties the likelihood of trade is reduced. More than ever, private sector development programs are aware of the increasing globalization of trade. The implementation of trade promotion initiatives, import-export programs, production of high-value crops for export, business development centers and other trade related programs require the participants have a good understanding of one of the most critical aspects of trade: getting paid. As new technologies and advances in communications are changing trade logistics and speeding and facilitating transactions, businesses are finding new opportunities and new ways to operate. Today, financial letters of credit can be opened by email, commitments for foreign exchange hedges can be made over the telephone and the purchase of container loads of produce and their shipping costs can be charged to corporate credit cards. Despite these cutting-edge advancements most payment transactions still follow basic rules.
II. Common Payment Methods
Insuring payment starts long before a contract is signed. It is up to the seller, or his representative, to perform ‘due diligence’ or a reasonable assessment of the risks posed by the potential buyer. The caveat, "know who you're dealing with" applies firmly here. Even the most rudimentary market research ought to be able to provide some information on the buyer: · In many developed countries chambers of commerce, Better Business Bureaus or their equivalents are a good start · In the U.S. the Red Book or the Blue Book can be used to assess buyers of products · some of the larger credit reporting services such as TRW and Dun & Bradstreet have international affiliates and a reasonably priced credit check can be conducted in a matter of minutes via the Internet · Trade associations and trade promotion organizations can sometimes be informative · Of course, freight forwarders, brokers, and even banks can be excellent sources of information · Many sellers are uncomfortable directly asking the buyer to provide references but this can yield not only useful information about the buyer but also access to an expanded network, not to mention potentially improving the buyer’s conscience since he must consider that his standing with other sellers in this network would suffer should he not make timely payment
Questions to ask before selecting the payment method
The next step is for the seller to use the information to make a decision based on a frank assessment of his risk tolerance. Answering some simple questions at this stage can help to avoid catastrophe later on.
· Can the business afford the loss if it is not paid?
· Will extending credit and the possibility of waiting several months for payment still make the sale profitable? · Can the sale only be made by extending credit?
· How long has the buyer been operating and what is his credit history? · Are there reasonable...
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