Hi. I need help with replies to these posts:

1. Distribution of risk

• A time draft is used to establish the time of payment; that is, the payment is due within a certain time after the buyer accepts the draft. A date draft, which specifies the date of payment, is sometimes used. When a time draft is used, the customer can potentially delay payment by delaying acceptance of the draft. An exporter can prevent such delays by either using a date draft or tying the payment date to the date on the bill of lading (e.g., thirty days from the date of the bill of lading) or draft. The collecting bank holds the draft to present for payment on the maturity date. This method offers less security than an S/D, D/P because documents that certify ownership of merchandise are transferred to an overseas customer prior to payment. Even when the customer is willing and able to pay, payment can be prolonged by delaying acceptance of the time draft.
• Consignment -This is a method in which the exporter sends the product to an importer on a deferred payment basis; that is, the importer does not pay for the merchandise until it is sold to a third party. Title to the merchandise passes to the importer only when payment is made to the exporter (Shapiro, 2006). Consignment is rarely used between unrelated parties, for example, independent exporters and importers (Goldsmith, 1989).
  • Example: In some cases, the exporter request to pay the invoice before 90 days as per our policy. In this situation, we request to the exporter if they need the payment prior 90 days, they have to provide a discount depending the payment term agreement. Many of them accept and negotiate to received the payment earlier, but what happen with exporter that is not agree with this payment term? The say, "hey you need my product for your production or manufacturing, so I don't sent any order if I don't received the payment in advance or 30 days. Purchasing team need to create a form, that need to be approved from top managers and when is approved, the exporter decide to shipped the product. Payment terms play an important role when is related with money from others and how we can handle this issue from this particular exporter.

Most merchandise sales by U.S exporters to overseas buyers are made on the basis of one of the following methods of payment:

• 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. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms.
• Open Account
  • The seller is sending the buyer goods without any negotiable evidencing the obligation and is dependent solely upon the buyer to make the payment. 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.When offering open account terms, the exporter can seek extra protection using export credit insurance.
• Documentary Collection
  • Export collection require that the seller forward documents and instructions to his bank, which will pass them to a foreign bank for collection. Under this method, the exporter or his or her forwarder sends collection instructions directly to the buyer's bank and a copy to their bank for follow-up.
  • A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer's bank (collecting bank), with instructions to release the documents to the buyer for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The collection letter gives instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offer no verification process and limited recourse in the event of non-payment. D/Cs are generally less expensive than LCs
• Letter of credit
  • 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. The letter of credit afford the seller the highest degree of protection. A letter of credit is issued by the opening bank assuring that certain payments will be made under specified conditions

2. A risk involved for exporters/sellers relating to international transactions is the chosen terms of payment. Various ones exist and each involves different levels of risk:

- Cash in advance is the term of payment that involves the lowest level of risk to the seller/exporter since the payment is made prior to transfer of goods or services to the importer/buyer. This is not a popular payment term for importers nor buyers.

- Letter of credit is issued by a bank which guarantees the payment under certain specific conditions stated therein. It provides protection to the exporter/seller and also for the importer/buyer. Payment will be made by the bank after presentation of documents which fulfill the terms and conditions.

- Documentary collection involves the bank since the seller/exporter will include documents and instructions for the bank. The bank controls the cargo until the payment is made. This does not eliminate the country risk or that the importer/buyer cancels the negotiation.

- Time Draft is a bank draft that is a guarantee to pay after a certain period of time after it is received and accepted. The time draft specifies the number of days payment will be made after receipt. It provides some time for the importer/buyer to verify the goods and confirm satisfaction.

- Open account is where no financial institution is involved so the exporter/seller must be confident or know the importer/buyer and trust on the payment of the cargo. There are no bank charges, but it leaves an open risk to the exporter/seller. The open account presents a high level of risk since there are no banks involved.

- Consignment is a variation of the open account where the payment is made to the exporter/seller after the goods are sold by the importer/buyer. This is the riskiest and could present more complications as product has to be sold. This requires knowing the importer/buyer and potentially having a long-term relationship.

The decision on which payment term to use as an exporter/seller will depend on various scenarios and conditions. Overall, the letter of credit is one that balances the risk to sellers and buyers. Therefore, it is the most common used as it protects the exporter/seller by eliminating the foreign country risk and commercial risk.