Page 212 - DMGT547_INTERNATIONAL_MARKETING

Unit 12: Export Procedures and Policies

6. Arranging Financing: Exporters must arrange for a method of payment and should consider Notes
the risk liability, which holds the market power, the level of trust in the relationship/
outcome and an examination of the final export product.
Cash in Advance: Payment is to be made up front in cash. Cash in Advance is common
when the product is in great demand, when the buyer has poor credit or when the
importer’s country is unstable.

Letters of Credit: Document issued by bank, usually at the request of a buyer, obligating
the bank to honor the seller’s draft. This is the most common method of payment for
international exporting. There are two different forms of letter of credit:
1. Sight draft: an exporter’s bank requests payment directly from the importer’s
to automatically transfer funds.
2. Time draft: an extension of credit to the importer. The importer can defer
payment for a period of time. It is the bank’s responsibility for collection and
also their reputation on whether or not the payment will be made. There are
also site and time versions of drafts for collection. This entails payment on
maturity of draft or upon its presentation.

Open Account: Seller ships the products with an invoice and waits for payment. This
is the cheapest method of payment, but also the riskiest. This method is most common
and makes the most sense for intra-company shipments. Companies may choose to
finance their efforts through internal funding from profits or externally through
investors, banks, and governments. There are two kinds of financing available for
exporting. Working capital loans acquire supplies, develop overseas markets, or
build inventories. Transaction loans support specific transactions. In order to acquire
these loans, an exporter needs export credit insurance before a bank will provide
any type of financing.

Notes Companies unable to secure financing from banks can turn to other financing
options.

Boutiques: Private lenders called boutiques will back export deals deemed
too risky by bankers. Although they appear to be an easy solution, they charge
high service fees.
Forfeiting: This is a sale by an exporter of a receivable to a forfeit company for
a discounted payment. When dealing with some countries, exporters may
have to fund the importer, especially in developing countries where interest
rates are devastatingly high. If you can offer terms beyond 180 days, it may
increase your business prospects.

Factoring: This is the sale of export receivables to a factoring firm, which will
undertake collections. A company that handles factoring will transfer the
invoice into the importer’s currency, pay the exporter, and then collect the
payment from the importer. Factoring is mostly used in developed countries
where the risk is low and collection is high.
All of these methods of financing can be effective but you must analyze your exporting process
and the importing country individually to determine the best fit for your company.

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