FOREIGN EXCHANGE PAYMENTS
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This document discusses various payment methods for foreign market transactions: - Cash in advance requires upfront payment before goods are transferred and is the least attractive option for buyers due to cash flow issues. - Letters of credit provide security as the buyer's bank pays the exporter's bank upon shipment verification, protecting both buyers and sellers. - Documentary collections involve both banks acting as intermediaries, with payment transferred once the exporter provides proof of delivery. - Open accounts allow goods to be shipped and delivered before later payment, benefiting buyers but increasing risk for exporters. - Consignments see goods sent abroad and sold by an agent, with payment only remitted after end customer sales, making this
FOREIGN EXCHANGE PAYMENTS
- 2. Foreign exchange • Converting one national currency to another or transferring currency from one country to another • Evitt, has defined foreign exchange market as follows: “that section of economic science which deals with the means and methods by which rights to wealth in one country's currency are converted into rights to wealth in terms of another country's currency”.
- 3. PAYMENT METHOD Cash in Advance Letters of Credit Documentary Collections Open Account Consignments
- 4. Cash-in-Advance : With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. § For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. § With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow.
- 5. Letters of Credit: LCs are one of the most secure instruments available to international traders. § The buyer establishes credit and pays his or her bank to render this service. § An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. § An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised.
- 7. Documentary Collections Exporter's bank and importer's bank will be middlemen. § Exporter will not give the goods before getting the evidence of payment transfer to his account. He has to give proof that he has the money equal to bought goods. § Importer will not transfer money before getting the evidence of delivery of goods. Exporter fulfills all the documents which are the evidence for importer and gives to the banker and same banker will give to the banker of importer. § Banker of importer will transfer payment to the banker of exporter.
- 8. Open Account An open account transaction is made for sale where the goods are shipped and delivered before payment is due. Buyer makes periodic payments • An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales 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. Exporters who are reluctant to extend credit may lose a sale to their competitors.
- 9. Consignment - Exporter can send the goods on the consignment basis. - In foreign country, there may be exporter's agent who will sell the goods on the behalf of consignor. - Time to time, agent will send the money to consignor. • Here payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. • It 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. • Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of an independent distributor or agent.
- 10. End
Editor's Notes
- #5: ESCROW SERVICES: Third party receives and disburses money