International Payment Methods

One of the subjects of international business that I have a particular interest in concerns the different payment tools that importers and exporters use when selling goods. There is an added level of risk present when conducting transactions internationally. This risk is in the form of theft, fraud, non-payment, complications of multiple governing agencies, and the inability to meet time deadlines. There are many financial payment tools that are currently being used to combat the problem of international transaction risk.

The most common payment types for an international transaction are a letter of credit, documentary draft for collection, open account, payment in advance, and barter.

Most of these transactions involve not only the importer and the exporter, but the respective banks of the parties involved, freight forwarders, and government customs agencies as well.

The Role of an Importer: An importer is a company that is bringing in, or importing goods to their domestic market for sale or distribution. Importers benefit from this practice because they can acquire products at a higher quality, or lower price, than would be available domestically.

The Role of an Exporter: An exporter is a company that is shipping, or exporting, goods outside their domestic market for sale or distribution. Exporters benefit from this practice by making a profit with the sale or transfer of goods to international markets, or by expanding into new international markets to broaden their customer base.

The Role of A Forwarding Company: A freight forwarder is a company that ships goods, on a regular basis, to different locations around the world. An exporter will call a forwarder if that exporter wants to ship goods overseas without having to take on the responsibilities of logistics, customs, and paperwork by themselves. A freight forwarder's main concern is the efficient shipment of goods all over the world. Another objective of the forwarder is to make money. They make their profits by streamlining shipments, increasing efficiency, and spreading out costs by moving a constantly high volume of products on a regular, routine basis (Hickman, p.138). Regardless of the forwarder's desire to make a profit off of the exporter, an exporter ends up saving a lot of money by using a forwarder's services (Hickman, p.139).

The money that a forwarder might charge to ship a product is minuscule

compared to what an exporter would pay if they tried to ship the products without using a forwarder (Hickman, p.139). Forwarders know the customs regulations of all of the world's countries. Forwarders handle the massive amounts of paperwork that is involved in exporting a product to a different country. Forwarders have good working relationships with the shipping companies that provide actual overseas transportation. Forwarders have massive experience in all aspects of an import/export operation.

The bottom line is that employing the services of a forwarding company is always a good idea for an exporter.

The Role of Governing Agencies: Customs agencies are powerful departments of a national government that regulate what comes in and goes out of that country (Weiss, p.171). Some of the tasks of a customs agency are:

* Check for the possibility of a contraband item entering or leaving the country.

* Collect duties, tariff fees, and enforce quota restrictions.

* Ensure the proper specification/labeling of imported products are to the standard of that country.

* To account for products entering or leaving the country.

They do this to get statistical information concerning domestic product flow to and from other countries, computation of consumption rates, and to help in computation of the domestic country's GDP. Knowledge of the customs regulations of the importing and exporting country is absolutely critical in maintaining a successful import/export operation.

The Role of a Bank: The role of a bank concerning an import/export operation is structurally the same as a traditional, domestic banking relationship. Banks serve as a company's main financial resource by providing tools to raise capital, a place to store capital, and most any dimension concerning a company's money. Banks also provide an importing/exporting company with risk reduction tools such as a letter of credit, documentary drafts for collection, and verification of an international trading partner's financial credit and well being.

Letter of Credit: A very common payment method for a cross border transaction between two companies is a letter of credit. A letter of credit reduces most of the risk and uncertainty that is usually involved when goods are purchased from, or sold to a foreign, and sometimes unfamiliar client (Sowinski, p.82). The reduction of risk with using a letter of credit comes from intensive bank involvement with the entire transaction process. Banks generally issue two distinctly different letters of credit; the first being a personal letter of credit, and the second is a commercial letter of credit.

A personal letter of credit is issued to an individual who travels a lot, and wants to forward some money to a foreign bank for convenience, risk reduction, or exchange rate arbitrage.

A commercial letter of credit is what a company would use to make a foreign transaction (Weiss, p.101). I am only interested in, with respect to this observation, a commercial letter of credit, and will imply the transaction as simply a letter of credit.

A letter of credit is a statement created by a bank, and guarantees payment for shipped goods if the agreed conditions within the letter of credit are met (Luxton, p.93). Here is how a letter of credit works:

* Two companies decide to make an exchange of goods in the near future. A pro-forma agreement is made and the transaction process begins. Both companies need to have a good working relationship with their respective bank for this to work.

* The importer of the goods, after reviewing the pro-forma contract, issues an application to the importer's bank for a letter of credit.

* The importer's bank reviews the terms of the proposed letter of credit, makes sure that the importer has sufficient credit to make the transaction, and finalizes the proposal.

* The importer's bank sends the letter of credit to the exporter's bank. The exporter's bank also reviews the terms of the letter of credit, checks the financial position of the exporter, and because the letter of credit is a legally binding document, the exporter/exporter's