International Trade Payment Method with Special Reference to Bangladesh

Topics: International trade, Trade finance, Bank Pages: 10 (3139 words) Published: August 23, 2013
To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms supported by 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. This trend is attributable to the increased globalization of the world economies and the availability of trade payment and finance from the international banking community. As shown in figure 1.1, there are four primary methods of payment for international transactions. During or before contract negotiations, we should consider which method in the figure is mutually desirable for both me and my customer.

Figure 1.1. Payment Risk Diagram
Key Points
• To succeed in today’s global marketplace and win sales against 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.

Objective of the study:
The objectives of the study are:
1. Discuss theoretical aspects of international trade payment and finance. 2. Discuss Bangladesh aspects of international trade payment and finance.

Theoretical Aspects:
There are four standard and common payment methods that are in use to make or receive payment for international trade market. It basically means received of payment against export and making payment against import: 1. Cash in Advance.

2. Open Account / Supplier credit.
3. Documentary collection.
4. Documentary Credit / Letters of Credit L/C.

From the very title it is obvious that cash will be in advance. With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, because it creates cash-flow problems. Foreign buyers 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. There are some features of Cash-in-advance

* Interest of exporter is fully protected.
* Interest of importer is not protected.
* Banks are involved in the process of transferring payments. * Documents are shipment are directly handle by the exporters. * It is guided by Purchase and Sale Agreement.
* It is one of the cheapest and least popular methods in the world.

Open Account:
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. Because of intense competition in export markets, foreign buyers 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 a sale to their competitors. However, the exporter can offer competitive open account terms while substantially mitigating the risk...

References: * U.S. Department of Commerce International Trade Administration
* tipub2374_chapter2.pdf
* Class Note.
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