Export Payment and Risk Management
A key concern in any export transaction is to ensure the seller gets paid and the buyer receives their goods. The banking system provides a complete mechanism for settling trade transactions.
The method to be used in paying for exports is reached by agreement between the exporter and the importer. The relative bargaining strengths of each will affect the final outcome.
Exporters should try to maintain control of their goods through their documentation of title (Bills of Lading). Surrender of this control is a calculated risk that the exporter takes and the degree of risk varies with each method of payment. Remember that while the exporter maintains control of the goods, in the event of the importer’s default, the goods may be resold or returned.
The most important factors influencing the attitudes of the two parties are:
• Safety of the transaction from the exporter’s view with respect to buyer risk, exchange rate movement and transfer or country risks
• If the exporter is prepared to extend credit terms to the buyer
• The importer’s views which are likely to be influenced by competing suppliers’ terms, trade practice, the cost of interest if applicable, and bank charges.
Methods of Payment
There are four basic methods of collecting payment:
2. Open Account
3. Documentary Collection (sight or term)
4. Documentary Letter of Credit (DC)
(Exporters using Documentary Collections or Documentary Letters of Credit should make themselves familiar with International Chamber of Commerce Uniform Rules for Collection Publication No. 522, 1995 revision and Uniform Customs & Practice for Documentary Credits Publication No. 600,2007 revision)
Before examining each method, we will first describe the risks noted above which influence the method chosen.
The risk of insolvency, default, fraud by either the buyer or the seller is termed the credit risk. Exporters therefore must be sure that buyers are reliable parties. Reports from overseas credit agencies such as Dunn & Bradstreet on the financial strength and business reputation of firms and individuals are obtainable. In the case of documentary credits (DC), credit risk exists on the issuing bank of the DC.
When selling or buying goods for a price expressed in currency other than your own domestic currency, an exporter can determine the price equivalent in AUD at the time of quoting for the sale and commitment to the commercial transaction. However, the settlement of trade usually involves some delay between the time of entering the contract and the actual payment for the goods involved. Therefore the AUD value may increase or decrease before the actual settlement between seller and buyer is made. This possibility of exchange rate movement is referred to as ‘exchange risk’.
As an exporter you may either receive more or less AUD for the foreign currency equivalent of your export. A degree of exchange risk is evident in every method of payment where the exporter quotes a price in a currency other than the exporter’s own domestic currency.
The exchange risk can be reduced by:
• Entering into a forward exchange contract
• Conducting a foreign currency account
• Offsetting export receivables against import payables
• Where pre or post shipment finance is provided by an overseas currency loan in the currency of the contract by applying the export receipts in repayment of the loan.
• Taking out an option or futures contract.
When an exporter enters into a contract of sale with an overseas buyer, a transfer risk is created. While the buyer may have the ability to pay for the goods in his own domestic currency, he may be prevented by exchange or trade controls in his own country from settling his obligations to the supplier (exporter).
Weakness in the economy of the buyer’s country, such as low level of external foreign currency reserves and balance of payments problems all point to the possibility that transfer difficulties may occur. Exporters should take careful note of such matters and ask their bank, credit insurer and/or relevant government agency e.g. Austrade or EFIC if they are concerned about conditions in a buyer’s country.
The risk of a country ceasing or restricting access of particular goods into their market place by the use of embargos, tariffs and quotas. The risk of countries ceasing to deal with other certain countries for political reasons, for example both the UN and Australia have selected sanctions in operation on certain countries. For up to date information see the www.dfat.gov.au
The risk of buyer unwilling to accept goods (repudiation) or the seller providing incorrect or
A complete outline of Payment and Finance methods can be found in the Australian Export Handbook- 20th Edition, available through the Australian Institute of Export.