UNIT 4: FINANCING INTERNATIONAL TRADE

1. What are some of the risks involved in trading internationally?

+ Risk of not being paid (for the exporter)
+ Risk of not receiving goods (for the importer)
+ Risk of receiving goods which are different from those ordered or of lower quality or in a
damaged condition
Risk of force majeure (Eg: storms, disasters etc.)
2. What payment methods do you know that are used when exporting or importing goods?
+ Open account
+ Document credit
+ Bills for collection
+ Advance payment
3. What is the role of the banks in international trade?
+ Active role: When the Banks get involved in the payment process, supporting both the exporter
and the importer to complete their obligations so that the contract is carried out as agreed. For
example, in the documentary credit method of payment.
Passive role: When the bank only do things as requested. For example, just transferring money to
the account of the seller/exporter.
* Open account
- Is only used for transactions between exporters and importers which have already established a
trust-worthy and long-term business relation.
- Saving time for both exporter and importer as they deal directly with each other – not much
involvement of banks.
* Documentary credit
- Being used worldwide
- Safer for exporter as it makes sure he will get his money for the goods sold provided that he
presents the correct documents
- Ensure the importer that he will get the goods bought as long as he pays for them or agreed to
pay in a fixed date in the future.
- Greatly supportive involvement of banks in the transaction process.
- Taking more time than other methods of payment
* Bills for collection
- Clean collection: more risky as the importer can use the documents of the title to receive the
goods only by agreeing to pay in a fixed date in the future
- Documentary collection: safer as the importer has to pay in return of the documents of title to
receive the goods after all.
- More passive roles of the banks. They only do what is required.
* Advance payment
- Safest for the exporter if the importer has to fully pay for the good bought in advance
- Still safe if the importer pays in part in advance
- Time saving
- Being used if there is more demand than supply for that kind of commodity.
Questions to answer
1. What is the commonest method of payment? Why?
- Letter of credit is the commonest method of payment. Because it is more secure. The bank must
pay even if the importer defaults on payment.
2. What information is there in a letter of credit?
The name and address of the exporter
-The type of credit (revocable or irrevocable)
-The expiry date
-The name and address of the importer
-The name of the party on whom the bills of exchange are to be drawn, and whether they are to
be at sight or a particular tenor
-Precise instructions as to the documents against which payment is to be made
-A brief description of the goods covered by the credit
-The terms of contract and shipment (i.e, whether ‘EXW’, ‘FOB’, ‘CIF’, etc.)
-The amount of the credit, in sterling or a foreign currency
-Shipping details, including whether partshipments and/or transhipments are allowed. Also
recorded should be the latest date for shipment and the names of the ports of shipment and
discharge. (It may be in the best interest of the exporter for shipment to be allowed ‘from any UK
port’ so that a choice is available if, for example, some ports are affected by strikes. The same
applies for the port of discharge.