Most international businesses such as exporters have benefitted from international trade finance. Such kind of financing for exporters is issued by an export credit agency or ECA. These agencies can either be a private or quasi-government institution acting as a mediator between exporters and government during transactions.
Export financing can be in the form of credits for financial support or credit insurance and guarantees. Take note that this form of financing depends on the permission granted to the ECA by its government. An ECA is also capable of offering credit on their own account which is quite similar to normal banking transactions.
Export financing provide financial backing to the exporters so the exporters can provide their clients with the most complimentary credit terms. Export financing generally involves loans made for the distribution of products outside a country or business territory. Those businesses with products that appeal to business based in other countries, should consider an ECA in bringing the products where it has to be.
Since the goal of exporters is to pay in full and on time, a suitable payment option must be carefully selected to minimize payment risk and at the same time, maintain the service needed by the buyer. International trade financing through export financing includes four payment options, namely: Cash-in-Advance, Letters of Credit, documentary collections and open account. As an exporter, be sure to choose a payment method that is desirable to you and to your customer.
In an international trade financing for export through Cash-in-Advance method, payment risk is almost eradicated as the payment is received by the exporter and the transfer of ownership of goods. This type of payment method, however, is seldom selected by buyers because it poses risk of cash-flow problems. Exporters must not insist on this type of payment to prevent losing their customers to competition. Letters to Credit, on the other hand, is a more secured payment method.
Letters to Credit as an international trade financing payment option can generally protect the buyer as no payment can be made until the goods are shipped. Documentary transaction involves the exporter’s bank in receiving payments from importers in exchange for documents using drafts, which are less expensive than Letters of Credit. In an Open Account, payments are only made by importer until the goods are shipped and delivered. This option poses the highest security for importers yet highest risk for exporters.