https://dailyasianage.com/news/150841/securing-payment-without-export-lc
EDEN BUILDING TO STOCK EXCHANGE 25 November 2018
Securing payment without export LC M S Siddiqui In the international business, it is more important for exporters to offer to their customers' appropriate payment methods. The growing payment method is now cash against document. Buyers are more interested in cash against documents and seller look for security of payment and export against contract. There are five primary methods of payment for international transactions. Export trade presents a spectrum of risk, which causes uncertainty over the timing of payments between the exporter and foreign buyer. For exporters, any sale is not complete 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 advance payment is a risk 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. The payment of international trade may include: (a) Cash-in-advance, (b) Letter of credit, (c) Collection against documents, (d) Open account. The best payment terms for exporter are cash-in-advance payment as they have no credit risk. The payment use to complete before transfer of ownership of consignment. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow. 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. Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer establishes credit and pays to bank to open LC as guarantee of payment. An LC is open with reliable credit information about a foreign buyer but it is difficult to obtain. An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised. LC has many limitations as the methods only deal the documents but not the actual consignments in practice.
The collection against documents is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer's bank (collecting bank), with instructions to release the documents to the buyer for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. The collection letter gives instructions that specify the documents required for the transfer of title to the goods. Banks in both the country of import and export are use to act as facilitators for their clients. The process offers no verification and has limited recourse in the event of non-payment. Collection against document is generally less expensive than LCs. An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales with a deferred payment for few days, is typically in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Consignment is another form of open account in which payment is sent to the exporter only after the goods have been sold by the overseas buyer/ distributor to the end customer. Clearly, exporting on consignment is very risky as the payment is not guaranteed in any form of banking system or guarantee. Consignment helps exporters become more competitive on the basis of better availability and faster delivery of goods. Selling on consignment can also help exporters reduce the direct costs of storing and managing inventory. Due to globalization and improved communications, winning sales against global competitors are depending upon attractive sales terms supported by the appropriate payment methods. An appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer. The cash against documents is ease of implementation by the buyer as its formalism is considerably reduced compared to the documentary credit and no need for bank credit line and the cost of transition is low. The bank also doesn't control the documents as contrast to letter of credit. Exporters send document directly to the buyers. Usually upon arrival of consignment at the destination, buyers use to collect documents to take possession of the goods and to clear the shipment at customs. In case of Letter of credit, documents are delivered by Banks to the customer only against payment or acceptance of a bill of exchange. This method is disadvantageous for exporter as banks are not engaged as for a documentary credit and so there is no bank guarantee of payment or insurance on the proper management of the process by the presenting bank. The bill of exchange may be guaranteed by a bank, which provides the supplier with a significantly higher payment security. In practical sense the payment is not guaranteed by bank 'until buyers give their acceptance' in writing or take the delivery of the documents. In case of letter of credit, any refusal of the buyer to take possession of documents and goods in similar status of cash against documents. In this case the seller is not paid and finds himself with the material located in the country of the buyer under the ownership of seller.
The unwilling buyers can put an objection on document on coma and full stop etc to hold the payment. The bank can negotiate with buyer for payment cannot pay until acceptance of buyer. Cash against documents is simple, and low cost option and best of all methods of export trade, if the payment is guaranteed. The financial market in developing countries including Bangladesh has no mechanism of guarantee of payment for import and export trade. Local bank may secure the payment against import to over suppliers against mortgage and involvement of banks in other countries. Usage Lc or UPAS is such security of against payment for inbound consignments. The problem of exporter is more acute. The exporters in Bangladesh is in a fix with their global exports and the buyers of Bangladesh products are paying higher price due to involvement of few banks such Lc opening Bank, LC transmitting Bank, Lc confirming bank and sometime 3rd bank for negotiation in case of lack of contract between banks with Bangladeshi Banks. Buyers also use to take loan from the day of opening of LC and pay interest and different charges. But in case of open account or supply against contract involve bank only after acceptance of documents by importer to the exporters. The headache of exporter is here that how to secure payment and the foreign exchange regulation and conservative banking culture don't permit such transactions for exports. The sellers in Bangladesh buyers in other countries are facing intense competition in overseas markets because of extra bank charges unlike our competitors including country like Vietnam who have regulatory protection against risk of payment for export against contracts or open account. There are some methods of securing the payment and also smooth transaction against open account and contracts either with insurance coverage or innovative trade finance methods. Exporters can offer competitive open account terms while substantially mitigating the risk of nonpayment by using one or more of the appropriate trade finance techniques. First Security Islami Bank Ltd (FSIB), Bangladesh has offered a new trade finance product TASDIR in collaboration of a foreign trade finance company Prima Dollar. The overseas partner will make the payment to exporter upon presentation of perfect documents acceptable to the buyer. The overseas partner will collect the proceeds instantly or offer credit to buyers. This is deferred payment facility to buyers. It may be a good solution for exporters and banks in Bangladesh to secure payment for exports and make the goods competitive. The writer is a legal economist. mssiddiqui2035@gmail.com