International Marketing Practices

Financial Instruments and Payment Methods for International Trade This section elaborates on financial instruments commonly used in international trade, specifically methods of payment. There are a variety of methods that enable exporting operations, such as letters of credit, consignment, open accounts, documentary collection, cash-in-advance, export working capital financing, factoring, and forfaiting. Each of these financial instruments has associated risks and benefits (Table 19), and it is important to consider which of these options will best assist a small to medium sized forest products producer overseas. Given their importance, letters of credit are discussed in the next section.

Table 19. Payment risk diagram [196].

Least secure

Less secure Secure

More secure Most secure

Exporter

Consignment Open

Documentary collections Documentary collections

Letters of credit Open account

Cash-in- advance

account Letters of credit

Importer

Cash-in- advance

Consignment

Consignment. Consignment financing is an arrangement in which the exporter maintains ownership of the goods throughout shipment and storage until the product is sold. A foreign distributor receives, manages, and sells goods for the exporter, who receives payment only after a sale has occurred [196]. Consignment can be risky for export operations because laws vary between countries, making absolute ownership undefined between importer and exporter. The payment timeline is not guaranteed or steady, causing risk to profits and company financial status [179]. Distance and communication issues are also grounds for concerns, but despite these risks, consignment allows exporters to more competitively operate their business by offering easily accessible goods [20, 196]. Open account. An open account is used when merchandise is shipped overseas without guaranteed payment in return, typically within 30, 60, or 90 days [196]. This form of financing often requires a previously established, good standing relationship with the importing company, good buyer credit and reliability, and export credit insurance to counteract the extensive risk associated with open accounts [20, 23]. However, if an exporter were to decline this form of payment, they may lose business to a competitor [196]. Documentary collection. This is used to ensure that buyers pay for open accounts within a certain time frame or ensure that payment is actually made [20]. It allows an exporting firm to outsource payment collection to their bank, operating in a manner similar to letters of credit (see next section) [196]. Documentary collection can be broken into two sections: documents against acceptance and documents

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