Page 36 - Export and Trade

the exporter will be paid upon production of certain This simply means that the importer must instruct his
documents. This promise is normally transmitted bank to transfer funds to the exporter before the bank
WKURXJK DQG EDFNHG XS E\ D EDQN will let him have the documents. This provides some
For example, an importer will state in a letter of credit measure of security to the exporter, but not as much as
WKDW KH XQGHUWDNHV WR SD\ 86 IRU ¿YH FDUV an L/C. The importer has the option of simply refusing
provided the exporter produces evidence that they have to accept the draft, in which case he cannot take
been placed on board a direct ship before the end of possession of the goods, but neither does the exporter
December. This letter is also signed by the importer’s receive payment. In cases where the importer’s business
bank, which immediately assumes liability for paying collapses, the exporter can be left exposed.
the US$50,000 to the exporter, as soon as he is able to Drafts can also be drawn at sight – i.e. payment
comply with the conditions. For this reason, banks treat is made on the spot, or subject to terms. If a term is
letters of credit as no different from any other credit VSHFL¿HG WKH EDQNV ZLOO UHFRYHU LQWHUHVW LQ DFFRUGDQFH
facilities and will allocate ceilings to applicants, like they with the terms of the draft.
do with overdraft limits.
On the 28th of December, the exporter produces 2SHQ DFFRXQWV
DQ RQ ERDUG ELOO RI ODGLQJ WR KLV EDQN LQ -DSDQ DQG WKH This is the method used by most companies who have
amount of US$50,000 is credited to his account. The transactions with associated companies or where there
-DSDQHVH EDQN UHFRYHUV WKDW DPRXQW IURP WKH 1HZ are no issues of security – for example, long standing
Zealand bank that in turn debits the importer’s account. trading relationships developed on the basis of mutual
7KH -DSDQHVH EDQN VHQGV WKH ELOO RI ODGLQJ WR WKH 1HZ trust.
Zealand bank who passes it on to the importer, so as to Most companies will extend credit terms to their
enable him to take possession of the goods. clients, subject to them meeting certain criteria. While
It is also possible that, instead of the various WKLV LV WKH PRVW HI¿FLHQW DQG OHVV FRVWO\ RSWLRQ LW
payments taking place against production of documents, also entails the biggest level of risk. Many traders are
the letter of credit states that they will take place at prepared to accept those risks domestically, but are
some future date, say 30 days. In these cases, the reluctant to do so internationally, where debt recovery
banks will be pleased to oblige, as long as they get the can be more complicated.
interest, which may be payable by the importer or the Some exporters will simply demand payment in
exporter, depending on the terms of the L/C. advance before they will ship the goods. This way, the
It is therefore easy to see how letters of credit protect importer assumes all the risks.
exporters and importers alike. However, we must not The selection of the method of payment is in essence
forget that they deal with documents and nothing a function of risk assessment. There are substantial
else. For example, if the cars were shipped without penalties for seeking too much security (in the form of
engines, there is no way that the banks would accept GHOD\V DQG FKDUJHV DQG HTXDOO\ VXEVWDQWLDO SHQDOWLHV IRU
any responsibility, since all the documents would still be running an unacceptable level of risk.
FRUUHFW ,W LV KRZHYHU SRVVLEOH WR GHPDQG FHUWL¿FDWHV Our advice is to look at these matters from a risk
of inspection by independent third parties, where such assessment perspective and then decide on the best
YHUL¿FDWLRQ LV LPSRUWDQW method. In our experience, many importers and
Banks will charge quite hefty fees for the provision H[SRUWHUV XVH / &V ZKLFK DUH QRW MXVWL¿HG E\ WKH ULVNV
of these services. Because the security of the involved but simply because “that is the way it has
transaction revolves around the physical possession and always been done”.
endorsement of the bill of lading, delays in transmission
will frequently cause demurrage at destination. It is Import documentation
therefore important that L/Cs are only used when such &RPPHUFLDO LQYRLFHV DQG FHUWL¿FDWHV RI RULJLQ
protection is required. There is obviously no point in Commercial invoices can be produced in any format.
using this rather complex and costly system when the There is no longer a requirement for “Customs Invoices”.
protection that it affords is not really needed. +RZHYHU LW LV LPSRUWDQW WKDW LQYRLFHV FRQWDLQ VXI¿FLHQW
information to identify the goods.
6LJKW DQG WHUP GUDIWV When the invoice price includes freight and insurance,
A simpler method of undertaking international it would be useful if the amounts of freight and insurance
transactions is that of bank draft against documents. included in that price were listed on the invoice.

34 NZ Export & Trade Handbook 2018