Page 39 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

International Trade Procedures and Documentation

Notes mode of payment enhances the export competitiveness of a nation in a cutthroat competitive
environment in international markets.

Example: Chinese exporters are using this method with active state support for winning
buyers in the African continent.

As this is a most risky payment option for any exporter, he must thoroughly analyse, appraise
and assess the quantum and degree of political, economic, and commercial risks involved and
history of past payment record of the importer as well economic and political stability of the
importer country. This mode can be effectively used with those countries where people are
enthusiastic about trade and wish to be counted in international markets, like the Germans,
Japanese and Italians. It has also been seen that cultural influences have an important bearing in
making payments on time and in full.

Figure 2.3: Process of Execution for Payment under Open Accounts

If the buyers are of sound creditworthiness and have a strong proven history of making payment,
this can be a satisfactory mode of payment as it involves least cost in ensuring payments. In fact,
many large organizations are using this mode as they have demonstrated long and favourable
payment record with their buyers and have thoroughly cross-checked the creditworthiness of
the importer.

Note This mode of payment has to be used smartly, as this is a very risky preposition for
any exporter as the absence of trade documents and banking channels as an evidence of
trade deal may make it very difficult for the exporter to pursue legal enforcement for
payment against the exporter.
The exporter has to pursue the claim for payment at the individual level, which is a very
lengthy, costly, time-consuming and difficult process in a complex international economic and
legal environment spanning two countries. Exporters may also have problems with regard to
pre-shipment financing of trade transaction as the receivables under such risky payment terms
are usually not financed by the bank, or are financed at high interest rates. Hence it is advisable
that exporters should properly and patiently verify and cross-check the political, economic, and
commercial risks involved in deal with importer and his country and are advised to consult
their international bankers before accepting any such kind of payment option.

Key Features of Open Account Method

1. Such a payment option can be used in safe and secure trade partnerships with importers
with whom the exporter has very good trade relations for a long period of time. Such
markets are also stable politically and economically, along with having a strong regulatory
and legal framework.
2. Such a payment mode, although offering a competitive and hawkish strategy on the part
of exporter to win new markets, also has significant exposure to non-payment risk and
some additional cost for insuring such risk under this payment mode.

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