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The payment risk can be mitigated by: |
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Receiving some down payment before starting
production. This generally varies form 10% to
30% of the order. |
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Order to be backed by Letter of Credit. While
accepting Letters of Credit, the following should
be considered: |
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a. Quality of the issuing bank.
b. Should be irrevocably and generally at sight
payment terms.
c. What currency? |
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d. Whether the documents required to be paid
under the Letter of Credit are simple and straight forward.
Generally documents required are: Invoice,
Packing List, Bill Of Lading, sometimes
Inspection Certificate issued by a bonafide
third party. There should be no document
required that is under the control of the Letter
of Credit
opener or the issuing bank. |
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Documents Against Payment (DP). Here the
Exporter has control over the goods till the
importer’s bank pays the Exporter. Once the
Exporter is paid or guaranteed payment, the Bill
of Lading, the vital title document, is handed
over to the Buyer. |
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Documents Against Acceptance (DA). The
acceptance of the draft or accepting the
obligation to pay the Exporter can be undertaken
either by a bank or the Buyer itself provided
the Exporter finds the Buyer a credit worthy
entity. |
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Open Account. Here the Exporter takes full risk
on the Buyer and hands over the goods based on
the Buyers promise to pay. Should only be done
selectively. |
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Currency of payment by the Buyer is important
as the Exporter might need to hedge this
currency risk. For instance if the Exporter’s
cost is in local currency and the payment will
be made (receivable) in another currency such as
dollars or Euros, the Exporter takes significant
currency risk is the dollar or euro devalues
against the local currency. Similarly if the
Exporter is buying some of the raw materials in
say dollars and selling the finished product in
Euros, the Exporter is taking currency risk if
the Euro devalues against the Dollar.
Export financing is available from banks and non
banks. For structured financing and where the
financing needs exceed what the banks are
willing to lend, Purchase Order Finance
companies are a unique source of funding.
Contact Ashford Finance to manage all your
export finance risks and to fund your
transactions quickly and creatively. |
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