Foreign Trade Services
Foreign Trade services products or services mainly include the products or services related to trade payment and trade finance. There is no doubt that sometimes it is hard to make distinction between trade payment and trade financing. Some commonly used trade services techniques in international trade are 1. Cash in advance 2. Open account, 3.Documentary collection, 4.Documentary credit (LC) 5. Standby LC or other bank guarantees, 6. Bank payment obligation, 7. Supply chain financing, 8. Factoring, 9. Forfeiting etc.
Cash In Advance
In cash in advance method of payment, the buyer places the funds at the disposal of seller (exporter) prior to shipment of goods in accordance with the sales/purchase contract which is certainly to be concluded between exporter and importer before the trade transactions. If the exporter is not sure about the buyers credit or there and other circumstances which cast doubt on the certainty of getting paid, a last resort is to ask for cash in advance. Since this method of payment contains a lot of risks on the part of buyers, they may not be willing to accept such terms of payments.
Open Account
Open account is the reverse of cash in advance. This is an arrangement between the buyer and seller whereby the goods are manufactured and delivered before payment is required. Through using the method, seller can avoid a lot of banking charges and other costs, but the seller has no security of receiving payment in due course. For this reason, the exporter may not be willing to accept this sort of mode of payment.
Documentary Collection
Documentary Collection method provides a means of payment whereby the exporter can ensure that the buyer would not be able to take possession of the goods until the client has paid or given a payment undertaking. In return for this payment or payment undertaking, the importer receives documents allowing possession of the goods. The system is appropriate to cases in which the seller is unwilling to provide the merchandise on open account terms but does not need a bank undertaking such as a documentary credit.
In this method, the exporter hands over the shipping documents (financial documents such as B/E and commercial documents such as transport documents, insurance documents etc.) to his/her bank and asks it to forward the documents to the buyer’s bank, with instructions to release them to the buyer on payment of his/her invoice. This is called document against payment (D/P). The exporter can also give the buyer trade credit by drawing a bill of exchange on him and requiring him to accept the bill when s/he collects the documents. This Is Called documentary collection against acceptance or document against acceptance (D/A).
Documentary Credit (Letter of Credit or LC)
Documentary Credit is a classic form of international trade payment method that substantially reduces risks for both exporter and importer. This is an arrangement whereby the importer’s or buyer’s bank is committed to pay an agreed sum of money to the exporter/ seller under some agreed conditions. Documentary credit or LC is an undertaking or commitment issued generally by a bank to pay the exporter a certain amount provided that the terms and conditions of the documentary credit are complied with. The conditions are about submission of certain documents in certain form. Documents must be in order to receive payment. Documentary Credit is guided by a classic form of set of rules known as Uniform Customs and Practice for Documentary Credits (UCPDC] published by ICC. In the payment mechanism of LC, banks have a very active role to play In the payment mechanism of L/C, banks have a very active role to play and the banks deal with documents only. Hence the payment, acceptance or negotiation under documentary credit is made upon presentation by the seller of all stipulated documents.
These documents (e.g., bill of lading, invoice, inspection certificate etc.) provide a basic level of proof that the right merchandise has been properly sent to the importer- although, of course, there is always the chance that the documents may prove inaccurate or even fraudulent. Although one of the costliest, it is often considered as the most secure because the buyer is assured that the seller will be paid only when the documents representing goods have been delivered. Conversely, the seller is assured that the buyer will receive the documents for ultimate delivery of the goods only when payment has been made. The security of the transaction is assured by one or more third parties. This is normally the buyer’s bank (issuing bank), which issues the letter of credit (L/C) and the seller’s bank advising/confirming bank), which informs the seller that the L/C has been issued and perhaps adds its confirmation to the L/C (in other words, guarantees the payment if the seller wants to be sure the issuing bank will not default).
Standby LC
The standby credit is to be distinguished from other types of letters of credit in that the primary function of the standby is to serve as a security or guarantee rather than as a trade payment mechanism. Under a typical standby, the beneficiary claims payment in the event that the contract partner has failed to perform or fulfill certain obligations. The Standby Credit is a Documentary Credit or similar arrangement, however named or described which represents an obligation to the Beneficiary on the part of the Issuing Bank to a) repay money borrowed by the Applicant, or advanced to or for the account of the Applicant, b) make payment on account of any indebtedness undertaken by the Applicant; or c) make payment on account of any default by the Applicant in the performance of an obligation.
International Bank Guarantees
International Bank Guarantees are availed for commercial and non-commercial purposes. Commercial guarantees are related to commercial contract between the supplier and the customer. Non-commercial guarantees are not directly related to commercial contracts but those are obligatory to be able to make a business. The demand guarantees may several purposes from indefinite range of payment, performance
obligation. Considering the structure, two types of guarantee demand guarantee, as defined by the URDG, involves a minimum of the parties: the principal; the guarantor and the beneficiary. Normally, the guarantor in the three-party structure is the principal’s bank and conducts business in the same country as the principal, while the beneficiary conducts business in a foreign country. Such three party demand guarantees are known as ‘direct guarantees’. On the other hand an indirect guarantee is a four-party demand guarantee, and there is an additional contract, that is, the contract between the instructing party (principal’s bank) and the guarantor (local bank in the country of the beneficiary). This contract has two aspects: one, the mandate from the instructing party to the guarantor regarding the instruction to issue the demand guarantee which the guarantor as mandatory must comply with if he accepts the instruction; and two the counter-guarantee (or counter-indemnity) that the guarantor requires from the instructing party as a pre-condition for issuing the guarantee and that is distinct from the indirect transactions the principal’s contract (mandate) is with the instructing party, not with the guarantor.
Factoring and Forfeiting
International factoring is the sale of assignments of short-term accounts receivable arising from an international sale of goods or services risk in open account trade. The international factoring business involves networks similar to the use of correspondents in the banking industry. Forfeiting is used to denote the purchase of obligations falling due at some future date, arising from deliveries of goods and services. Factoring is suitable for financing smaller claims for consumer goods, whereas forfeiting is used to finance capital goods exports.
Buyer’s Credit and Supplier’s Credit
Buyer’s credit is financing arrangement, where the seller’s bank makes money available for the buyer to pay the seller. It can in the form of a direct loan to the buyer or a loan via an intermediary organisation in the buyer’s country. This type of finance is usually without recourse to the seller, as it is the buyer that borrows the money. The seller also avoids the need to pay interest, as the loan is made to the buyer. Buyer credit facilitates
benefit both parties to the transaction: the seller receives cash on delivery or acceptance of the goods or service; and the buyer has affordable medium- or long-term finance that may not have been readily available in its own country.
Suppliers’ credit applies when the exporter’s bank lends the money direct to the seller. It is a form of post-shipment finance. Supplier’s credit may also be defined as a financial credit facility that is extended to a local buyer by the foreign Seller/ bank/ financial institutions preferably of seller’s Country. The local bank will issue usance bills under the LC for the Importer and in return the foreign bank will discount this LC.
Bank Payment Obligation (BPO) and Supply Chain Finance (SCF)
BPO is a payment tool offering a level of security similar to that of a letter of credit, The irrevocable undertaking on the part of an obligor bank (typically that of a buyer to recipient bank (typically that of a seller) to pay a specified amount on agreed date of condition successful matching of electronic data according to rules adopted by ICC. Using SGF provide technology and other services to facilitate payments and chain of enterprises. The services within a SCF platform include typical element of financing for international trade (like pre-shipment and post-shipment discounting of receivables, etc.) but not LCs. The objective of such a platform is to bring within a single unit of bank financial services related to supply, storage, cross-border relations between sellers and buyers, distribution, and final sales to customers.
