Page 62 - Export and Trade

Finance

Securing payment is a vital consideration in any The solutions
international trade transaction. Remember that an Four ways to settle international trade debts are: Open
export is a gift until it is paid for. Account; Bills for Collection; Documentary Credit; and
Advance Payment.
The risks The method of payment that trading partners choose to
Itisimportanttoidentifytherisksthatmaybefaced adopt depends on a number of factors:
when trading internationally and to be aware of some •Theleveloftrust.
ofthemethodsavailabletoreducethese risks.In • Creditworthiness.
international trade generally, there are different risks for • Respective bargaining power.
thesellerofgoods thanforthebuyerofgoods. •Conditionsimposedbyathirdparty,e.g.acredit
Many of these risks can be insured against or insurer.
mitigated through the payment mechanism. However, if ‡ ,PSRUW H[SRUW UHJXODWLRQV LQ FHUWDLQ FRXQWULHV
theexporterreduceshisriskthenthishastheeffectof • Financing requirements.
increasingtheimporter’srisk. • Custom and practice in the particular country.
Some of the main risks in international trade are:
Open Account
Country risk The Open Account method of payment is probably
• Political and economic stability. the most widely used. It saves costs and procedural
•Transferrisk/currencycontrols. GLI¿FXOWLHV DOWKRXJK WKH ULVNV WR WKH H[SRUWHU DUH
• War and civil disturbance. greater. Conversely, it represents the highest degree of
•Import/exportregulations. security for an importer.
Trading on Open Account terms implies that the
Commercial risk (importer) exporter trusts the overseas buyer’s business integrity
•Non-paymentof invoices. and ability to pay. This could be by having established a
•Delayedpaymentofinvoices. long-term relationship with the buyer, through obtaining
•Insolvencyofbuyer. favourable status reports or credit assessments on the
buyer, or it may be that credit insurance provides the
Industry risk FRQ¿GHQFH WR WUDGH RQ WKHVH WHUPV
•Demandsforparticularproducts. Alternatively, market forces may simply dictate
• Recession in particular industry. that Open Account terms are the only viable option to
•Competitiveproducts/pricing. conduct business.
• Fashionable or seasonal goods. With Open Account trade, the goods and relevant
documents are sent by the exporter directly to the
Foreign exchange risk overseas buyer who will have agreed to pay the
‡)OXFWXDWLQJ H[FKDQJH UDWHVDIIHFWSULFLQJDQGSUR¿W exporter upon arrival of the documents or within a
certain period after the invoice or shipment date. The
Performance risk (exporter) exporter loses all control of the goods, trusting that
• Problems in producing correct documentation. payment will be made by the importer in accordance
• Failure to supply goods in accordance with the sales with the original sales contract.
contract. However, an Open Account arrangement is not
entirely without risk to the importer. For example,
Transportation risk if the importer is committed to producing goods
•Risksassociatedwiththemodeoftransport,e.g. dependent upon receipt of imported materials, or has
marine risks. already ‘on-sold’ the goods to a third party, losses
•Storagefacilities in ports. could occur if the goods or materials fail to arrive on
•Delayedshipment. time or are faulty.

60 NZ Export & Trade Handbook 2018