There are essentially three steps that a company should take in deciding on the financial arrangements to be used in its exporting efforts:
- Determine the fo reign buyer's creditworthiness.
- Choose the method of receiving payments.
- Explore additional methods of issuing payments
Most foreign concerns do not prepare audited financial reports as is customary in the United States. Although credit information is usually more difficult to obtain, it is by no means less important to business dealings. The following are a few ways of obtaining the credit information vital to a successful sale:
- Request financial statements from the customer.
- Have an international banker request credit information from the customer's bank overseas.
- Ask the customer's commercial references for specific information.
- Contact credit agencies such as Dunn and Bradstreet's International Division or the Foreign Credit Interchange Bureau (FeIB) in New York.
- Look in government sources, such as the U.S. Department of Commerce's World Traders Data Reports (WTDRs), which provide descriptive, detailed background information on specific foreign firms.
To determine the safest and most feasible method of receiving payment for their exports, companies usually contact an international insurance company. The five basic methods of export financing are as follows:
- Documentary letter of credit
- Documentary draft for collection
- Cash in advance
- Open account
- Consignment
A letter of credit is a written pledge on the part of a bank to honor drafts or other demands for payment under the conditions specified. A letter of credit is issued at the request of a buyer. The beneficiary is the seller who is entitled under the terms of the letter to draw or demand payment.
In relation to export trade, a collection draft is an unconditional written order, signed usually by the seller, requiring the foreign buyer to pay the amount of the draft upon presentation of the instrument or at some specified future date. Drafts are also referred to as "bills of exchange."
If the terms of the export transaction are cash in advance, the buyer must prepay either the entire shipment or a portion of it. This type of financing is recommended only in cases where there is serious risk of nonpayment. Prepayment may be required for shipments to countries that are experiencing serious political or economic problems. Under normal conditions, cash in advance is required only when the goods are manufactured to the buyer's specifications, at great expense to the manufacturer.
Open account sales are sales based on credit arrangements between the buyer and the seller. Such agreements offer little recourse to the seller should the buyer default, because they are difficult to enforce in foreign courts, where legal procedures are often complicated. Thus open account sales should be restricted to a foreign branch or subsidiary of the seller/supplier or to a longstanding customer.
Under a consignment contract, the exporter (consignor) retains title to the goods until the importer ( consignee) sells them. Usually this type of financing is used with a U.S. company's overseas branch or subsidiary; it is not recommended for use with agents or other foreign customers.
The methods described above vary in the degree of protection they offer the seller and the degree of convenience they offer the buyer in making payments. Usually, the more protection the seller gets, the less attractive the payment terms are to the buyer. In determining which financing methods to use, the seller must compare the amount of protection desired with the need to make payment terms attractive in order to lure buyers. The following factors may help to determine the appropriate method of financing.
Buyer's creditworthiness
Amount of the transaction
Market conditions
Type of merchandise involved
Customs of the trade
Foreign currency availability
Applicable exchange controls in the foreign country
Political conditions in the foreign country
Terms offered by the competition
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