There are several methods used in international payment. These methods are used purposely for making and receiving international payments. The physical distance between the seller and the buyer and the fact that some transactions take place without the two meeting, is always in the mind of both parties and it minimizes the exposure to risks. The buyer has always to ensure that he/she receives the order in time and also in acceptable condition. The seller ensures that they get paid for the work of delivering the order on time and also in acceptable conditions. Some of the main popular methods of international payments are cash advance or TT, escrow, letter of credit, document against payment, the bill of exchange and the open account.
Methods of Payment
Several methods of payment are available for making payments of specialized large value equipments.
The cash payment method is the easiest method of international payment and it is used typically in situations where small quantities shipments are airlifted. This method is also applicable between sellers and buyers who have developed mutual trust. It is the cheapest and the easiest form of payment. It also negates the risks associated with dealings between two new parties because it involves large transactions dealing with specialized large value equipments. Some of the documents used in this method of payment are commercial invoices, packing lists and the way bills which are sent along with the goods in the same aircraft. Once the goods arrive at their destination the seller with the documentation clears with the customs and he/she gets access to the goods. Shipping of the goods is only done once the money is safe in the seller’s bank account.
It takes three to four days for such a wire transfer transaction to be completed in any part of the world. (Mishkin, 2003) Escrow is simply a legal arrangement or a common payment arrangement where money is transferred to the third party who is commonly known as the escrow agent. The escrow agent holds it in trust waiting the fulfillment of the contract conditions. After the conditions are fulfilled the escrow agent delivers the payment to the rightful recipient. This method of payment is popular when the buyer and the seller are unknown to each other. In the international trade scenario, once the two parties, that is, the buyer and the seller agree to transact, the money is paid to the escrow agent by the buyer and the escrow agent must be an agent known by both parties. The buyer of the goods has to send a promissory note which promises the seller that the buyer will make payment for the goods once they are shipped and they are in good condition.
The seller ships the goods and upon being received by the buyer, the escrow agent releases the payment to the seller. The letter of credit is simply a guarantee which is given by the bank to which the buyer belongs to. The bank gives an assurance that it will pay for the goods exported as long as the exporter will provide the necessary documents carrying the clauses that are specified in the letter of credit and do so in timely manner. The other name of the letter of credit is the documentary credit. Since the letter of credit deals in documents and not goods, the process works in favor of both the seller and the buyer. It is therefore simply a letter written by the bank of the importer to the exporter. It carries with it the information that the payment of the goods will be guaranteed when the bank is presented with the necessary and concrete documents, that is, the freight and the bills of lading documents. Most of these letters of credit are irrevocable. This means that it cannot be changed unless both the seller and the buyer agree.
The document against payment or the bill of exchange which is abbreviated as (D/P) is a document that is sent by the exporter to the importer to enable him claim the goods at the port. The exporter’s bank forwards the documents to the bank in the country where the importer resides. It contains the instructions on how to get the money from the buyer. Once the bank in the buyers’ country receives the documents, they provide the documents to the buyer after the buyer has paid for the goods. It can also be confirmed, unconfirmed or transferable. An open account is the opposite of the T/T. This is because the seller receives the payment once the buyer has received the goods and has done thorough inspection to ensure that the consignment is the right one, it is in good order and the goods are not spoilt.This method is highly risky to the seller because the buyer can interfere with the originality of the goods and claim that they are not the right goods. It is crucial to note that payment for the goods can be very costly depending on the method of payment that buyer chooses to use. For example, if the buyer chooses to use the money transfer as a method of payment, then he /she should send the full amount of he wishes to transfer and in addition part with additional amount to cater for the bank charges. (Mishkin, 2003) Correspondence banks take between one to eight Euros.
As compared to other methods of payment, the money transfer is deemed as the most expensive method. This is because the bank charges are normally very high and is therefore up to the buyer of the goods to choose whether to use this method or not. The Euro cheque has also been operational for sometime although it is currently out of use. The most probable cheapest method is the credit cards. It is also fast as compared to other methods because a customer who holds the credit card needs to only order for goods online, or fax the seller and then use the credit card to make the payment. The cash method is relatively faster than money transfer and also cheaper if the cost of the letter is put into consideration. In order for the buyer to steer clear of several problems that arise from paying in cash, it is advisable to send the cash as a registered letter. The buyers will be required (where possible) to send their payments in terms of Euro although there are other orders that payment can be done using the US $, Sterling pound, Canadian dollar, Swiss franc or the Japanese Yen.
The currency to be used should be in form of banknotes because the coins are unacceptable for the international trade transactions. A very recent and useful invention is the international reply coupons which can be bought at any post office any where in the world. The international exchange rate is one sterling pound per coupon. This method is very important in small transactions and I would therefore advice the potential customers to use another method of payment because their transactions involves large value equipments.To make safe payments across the borders it is even more wise for the buyer to use the telegraphic transfer/ cable transfer or wire transfer. It is faster and can be used to make huge payments for the large sized and valued equipments. This method of payment is safe because the only person who can collect the cash is the recipient and not any other person. It thus reduces chances of theft and financial irregularities. For safety and efficient purposes the most recommended methods of payments are credit card, wire transfer or the cable transfer (Sinkey, 2002).
Letter Of Credit
This is a document that is mostly issued by a bank or a financial institution. It provides an immutable payment duty. However it can also be unconfirmed, confirmed, transferable, revocable or back to back. It is abbreviated as L/C or LC. In most countries the word documentary credit is used to refer to the letter of credit. Currently the letter of credit is being used in transactions of significant value in international trade. This is mainly in deals between the wholesaler in one country and a supplier in another country and this method is therefore practical when the potential customers from the Middle East wish to import goods from Ireland. The parties to the letter of credit include the following, the beneficiary who is the person to whom the money is sent, the issuing bank, which is the bank the claimant, belongs to and the advising bank which is the bank the benefactor is a consumer.
The letter of credit incorporates the functions which are similar to those of the traveler’s cheque and the giros. In order to be able to get access to his credit, the beneficiary has to avail the following documents to the advising bank, the bill of lading, insurance documents and commercial invoice. The following is an explanation of the way the letter of credit works. First, the buyer has to go to his bank and request for a letter of credit where he/she specifies the amount in that letter of credit. The buyer has to state the beneficially in the letter of credit. Secondly, the buyer’s bank can issue a letter of credit by directly funding the buyer with a deposit of the amount the buyer has stated. This is in addition of the fees of between 1% to 8%.
The banks can also issue a letter of credit on approval of a standard loan underwriting process. (Bessis, 2002) Thirdly, the bank sends a copy of the letter of credit to the seller’s bank which afterwards notifies the seller that the payment has been done and he/she should ship the goods that the buyer has ordered for. The seller’s bank gives him the assurance that he will receive full payment for his goods. Fourthly, the buyer’s bank transfers the stated amount to the seller’s bank which is then credited to the sellers account. This is only possible if the letter of credit is in compliance with the conditions and terms of the transaction. It is advisable for the potential customers in the Middle East to note that the banks deal with documents related to the letter of credit and not the transaction itself. The buyers, who are the potential customers, have to know that a letter of credit has its own price or a fee paid to the bank. Despite this, the buyer can still shift this price to the seller.
Risks in International Trade
It is worth noting that there are also several risks that come with international trade. These risks are, exchange risks, credit risks, a force majeure risks, and other risks which occur due to the difference in culture, language and law. An exchange risk arises due to a change in the rate of foreign exchange. The credit risk arises due to change in the opposing business credit. The force majeure risk arises due to two things. One is due to occurrence of a natural disaster and the second due to incapability brought by the change of a country’s policy. In addition the potential customers from the Middle East need to know that war is another risk that can affect their trade dealings. The political relations between different countries have great influence on international trade. (Bessis, 2002)
Documentary Collections in International Trade
Documentary collection is a term that refers to the service given by banks to the exporters or the sellers in order to carry out the payment of a sale of goods in the international arena. This service is offered by two banks which utilizes the shipping documents of the seller. There are two types of documentary collections, that is, the export/import collections and the clean collection. In export/import collection category the seller has to present commercial documents such as the documents of title in return for payment. (Koudriachov, 2001) The seller is assured by the bank that the commercial documents, the bill of lading and the airway bill will not be given to the buyer until the seller gets his payment or he accepts the payment. After the seller gets his payment or accepts the payment then the documents are released to the buyer who uses them to collect his goods.
The importers has several advantages in this regard as follows, he can delay payment for the goods until the goods arrive to his destination or he can hold his cash by avoiding the need for making advance deposits and payments. The (D/P) or the documents against payment such as the bill of exchange is also another document that is used in international trade. It demands immediate payment of the goods from the importer. The (D/A) or the document against acceptance is sent by the buyer to the seller stating his acceptance of the transaction and stating a commitment to pay for the goods at a later date. There are other collections of documents used in international trade and they are grouped in accordance with the function they serve. For example, the administrative documents are used for the administrative purposes, commercial documents and the documents of origin.
Since Ireland is in the European region the transactions are simply carried out in terms of Euro currency and therefore any customer in the Middle East should convert his or her money into Euro in order to purchase the goods internationally from Ire land. (Mishkin, 2003) In basic terms the following is the exchange rate of the Euro against the dollar and the pound which can also be used to buy the goods Euro 1.580030 against the US dollar and 1.580030 against the United Kingdom pound.
The international trade comes with several risks especially in the Middle East because most of the countries in that region are in the process of recuperating from effects of civil war. Some of these risks are; delay in transaction periods, improper communication infrastructure, tough regulations on imported products and chances of goods being hijacked by war rebels in that region. Due to the above risks it is advisable for the transactions to be carried out using the safest methods of payment such as the wire transfer or the cable transfer and security personnel used to ferry the goods once they reach that region.
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Koudriachov, S. (2001), The Application of the Letter of Credit Form of Payment in International Business Transactions, (London, Oxford University Press).
Mishkin, F. (2003). Economics of Money, Banking & Financial, (New York, Addison Wesley Publishing).
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Sinkey, J. (2002). Commercial bank financial management, (New York, Prentice Hall).