Describe three different types of payment methods used in
international exporting and importing. Include the advantages or disadvantages
of each method.
Chapter 14
Exporting and Countertrade
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Answer:
ReplyDeletea. Cash in Advance—When the exporter receives cash in advance, payment is collected before the goods are shipped to the customer. The main advantage is that the exporter need not worry about collection problems and can access the funds almost immediately upon concluding the sale. From the buyer's standpoint, however, cash in advance is risky and may cause cash flow problems. The buyer may hesitate to pay cash in advance for fear the exporter will not follow through with shipment, particularly if the buyer does not know the exporter well.
b. Letter of Credit—A letter of credit resolves most of the problems associated with cash in advance. Because a letter of credit protects the interests of both the seller and the buyer simultaneously, it has become the most popular method for getting paid in export transactions. Essentially, a letter of credit is a contract between the banks of the buyer and seller that ensures payment from the buyer to the seller upon receiving an export shipment. It amounts to a substitution of each bank's name and credit for the name and credit of the buyer and seller. The system works because virtually all banks have established relationships with correspondent banks around the world. The letter of credit immediately establishes trust between buyer and seller.
c. Open Account—When the exporter uses an open account, the buyer pays the exporter at some future time following receipt of the goods, in much the same way that a retail customer pays a department store on account for products he or she has purchased. Because of the risk involved, exporters use this approach only with customers of long-standing or excellent credit, or with a subsidiary owned by the exporter. With an open account, the exporter simply bills the customer, who is expected to pay under agreed terms at some future time. However, in international transactions, open account is risky, and the firm should structure such payment methods with care.