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Site Contents for Secrets of International Trade
"The only reason that the bank's
services are needed is
because the exporter does not trust
the foreign importer."
If trust exists, there is no need to use and pay for the bank's services.
There would be instead the same payment terms as adopted by most commercial transactions within a country - whereby one firm sells goods to another, sends them the invoice, and in due course (usually within 30 says) receive payment.
This type of payment arrangement is known as open account.
Although, banks provide a useful and efficient collection service for exporter, they do not do it free of charge. So the cost involved for both collection of payment and the provision of financing when credit terms are involved, should be built into the exporter's quoted price to its foreign buyer.
Page 1/4 Get Paid for exporting. "There is no point in a firm exporting its goods, if it does not get paid for them."
<<This Page 2/4 "The only reason that the bank's collection services are needed is because the exporter does not trust the foreign importer."
Page 3/4 Letters of Credit Collection Procedures "steps involved in collecting an exporter's money"
Page 4/4 Online Internet Electronic Letters of Credit
The foreign importer, perhaps having changed its mind or its financial circumstances, may not pay for the goods when the documents are presented or when the time draft, even though previously accepted, falls due for payment.
Consequently, to be on the safe side, the exporter may require a bank letter of credit, as well as a draft.
letter of credit is a document issued by a bank at the request of the importer. Whereby the bank agrees to accept and/or pay drafts drawn upon it by the exporter so long as the conditions set out in the letter of credit (e.g., latest shipping date, no partial shipments etc.) are complied with.
Revocable versus Irrevocable
In other words, the importer may or may not be able to revoke its instructions to its bank, cancel or amend at any moment, by the foreign bank acting under its own or by the foreign importer's instructions. As a result, revocable letters of credit are hardly used in international trade.
Common sense would dictate, it is the
irrevocable letter of credit
that is in everyday use. Such a document, once issued, cannot be revoked or amended without the agreement of all the parties involved, the bank, exporter as well as importer.
Confirmed versus Unconfirmed
Not every foreign bank is scrupulous or financially solvent.
Sometimes a foreign bank, for one reason or another, will not honor its own financial commitment or perhaps due to, the sudden imposition or alteration of foreign exchange controls in the importing country may make payment impossible, even though the foreign bank wishes to honor its commitment.
Consequently, the exporter should, if
it is unsure about the foreign bank's reliability or the foreign exchange
situation - insist on not just an irrevocable letter of credit but one that is
confirmed as well.
A confirmed, irrevocable letter of credit,
means that the exporter's bank undertakes to pay the importer, should the foreign bank fail to do so.
The exporter's bank may be reluctant to confirm a letter of credit if it has any doubt as to the trustworthiness of the foreign bank or the possibility that foreign exchange controls may prevent the conversion of the importer's currency into the desired foreign currency.
In such a case, it may refuse confirmation unless the full amount of the funds is transferred to it right away from the foreign bank. Whatever the case, the exporter's bank will charge for such a service.
By stipulation that the foreign importer arranges for
a confirmed irrevocable letter of credit,
the exporter knows that if he ships the goods as agreed, he will have the foreign bank's assurance of payment as well as the assurance of his own bank.
The exporter retains ownership of them and if all or part of them cannot be sold, the exporter bears all the loss - either having them returned to the exporter's country or sold locally at perhaps greatly reduced prices.
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Next Page 3/4 Letters of Credit Collection Procedures "steps involved in collecting an exporter's money"
Page 4/4 New Internet eLC technology