Your
financing requirements begin at the time you decide to enter the export market,
but the serious financing requirements start once you get the order. The
contract that you negotiate with the importer dictates:
How you
will be paid
When you
will be paid
For what
you will be paid
These
are referred to as your 'payment terms'. All of these factors impact on your
post-contract financing requirements. Take, for example, if you agree to be
paid in 90 days. This will mean that you will not see any money from the buyer
for 90 days (and more, bearing in mind the time it takes for the money to reach
you). The 'how' also affects your financing requirements. As we said before,
'cash in advance' is good, while a 'revocable, unconfirmed LC' is not so good -
this affects your risk of payment and your chances of getting finance from
someone such as a bank. Also, what you agree to be paid for affects the
financing you require. If you have agreed to provide spare parts as part of
this agreement, then it may increase your income, but it also affects the
financing you will require. The lesson to be learnt here, is not always to
negotiate the biggest contract up front. A smaller contract reduces your risk,
financing requirements and may place less demand on your firm and by succeeding
with the smaller order, impress the buyer enough to purchase from you again.
The main steps in a typical
documentary credit transaction are:
When
you’ve finalised the export contract, your buyer (the applicant) arranges with
a bank to open a documentary credit in your favour. This foreign bank is called
the issuing bank (or opening bank) and will usually check your buyer’s
creditworthiness.
The
issuing bank sends the documentary credit to an Australian bank (the advising
bank). The advising bank verifies the authenticity of the documentary credit
and forwards it to you (the beneficiary).
The
documentary credit sets out the documents you must present to receive payment.
When you’ve shipped the goods and compiled all the necessary documents, you
lodge the documents with your Australian bank—called the negotiating bank—to
arrange the payment. In most cases, the advising bank and the negotiating bank
are the same bank and may be your regular business bank.
The
negotiating bank checks the documents to ensure the terms of the documentary
credit have been met. It then sends the documents to the issuing bank with a
request for payment. Sometimes a third bank, called a reimbursing bank, acts as
an intermediary between the negotiating and issuing banks.
If the
issuing bank is satisfied that you’ve provided all the necessary documents in
the exact form required by the documentary credit, it forwards the payment to
the negotiating bank, which in turn pays you. A documentary credit will state
whether you receive payment ‘at sight’ (immediately after bank verification of
the documents) or at an extended term (for example, 30 days after sight).
Contact for Suggestive Question Papers for latest Term End
Examination at ignousolutions99@gmail.com.
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