The purpose of a Business is solve problems and thereby creating value
while the he goal of a business is to make a profit. This therefore makes this
last factor very critical to the success of any export business. The payment
factor in this series focuses on how to source for funds from banks to pay for
products or raw materials procured from the local suppliers and how to get
payment for the exported goods from the buyers abroad.
The business plan of a new exporter should answer the following
questions about payment, both to local supplier and the receipt of inflow from
the buyers abroad. These questions include the following: What are the payment
methods available in export trade? Where is the place of valid export contract
in export financing? When is ordinary letter of credit not reliable as a
payment security? Who are those that are eligible to access export finance
products? Why are some payment methods not attractive to banks and is there a
way to make them acceptable? Which instrument can give banks comfort when
financing local supply? How can an exporter mitigate the risk of non-payment?
The first question states that, what are the payment method available in
export trade? This is a very crucial question that is also grossly
misunderstood by many exporters and sometimes bankers. The payment methods in
an export trade transactions include Open Account (Cash against documents),
Bill for Collection, Letter of Credit, Advance Payment and recently, a new one
was developed called the Bank Payment Obligations. Under open account
transactions, the export ship the goods and send documents directly to the
buyer who then clears the goods and pay the exporter at a later date like
60days or 90days after shipment. Bill for collection is another payment method
and it involves the transmission of documents through both buyer and seller's
banks and collection of payment through the same channel. The banks do not have
obligations to pay in this arrangement. The import can pay at the sight of
document or at a later. If the importer fails the pay, the exporter will be at
loss. Letter of credit will be treated under the third question. Advance
payment is the most secured method for the exporter because Payment is made
before shipment is done. Bank payment obligations is not yet in operation in
Nigeria. It is a technologically driven payment method that combines the
simplicity of Open Account and the security of Letter of Credit.
The next question states that, where is the place of valid export
contract in export financing? A bank needs to see and review the export
contract before financing an export transaction. This is because, the contract
forms the premise for the loan request. It helps the banker to know when the
preparation for the production and sourcing of products for shipment should
commence. It helps the bank to monitor the planning of the shipment with the
shipping line. It shows the bank what, where, when, who and how the payment on
shipment will be made. It informs the financiers the agreed price of sales for
the goods. It also helps the banker to know how best to package the loan
facility. Through the contract, the bank is also able to know the liabilities
and responsibilities of the exporters. It helps the banker to envisage the
likely challenges of the transaction and put in place the mitigants.
The third question is very pivotal and it states that, when is ordinary
letter of credit not reliable as a payment security? First of all let me define
letter of credit. This is the undertaken of the buyer's bank (issuing bank) to
the exporter to make payment when the shipment is made and all the documents
that complies with the terms of the letter of credit are presented. However, if
the letter of credit is coming from a bank in a jurisdiction that is facing a
sovereign risk (political and economic risk) or if the issuing bank ranking by
rating agencies is very low, then an exporter might need another bank in
another country to give an additional undertaken. This concept is called
confirmed letter of credit. So, an ordinary letter of credit here is the
unconfirmed letter of credit. Even though it has the force of a bank's
undertaken to pay however, it becomes unreliable for payment when the issuing
bank is exposed to sovereign risks.
Not all exporters are eligible for export financing and that is why the
next question is, who are those that are eligible to access export finance
products? Before an exporter can be considered to be eligible for export
financing, the exporter will need to provide the following information with
documentary evidence. History of performance- from the Bill of lading
records. Export volume per annum- from the Commercial Invoice and the Bill of
lading records. Frequency of shipment- from the Bill of lading records. Payment
Methods- from the Sales Contract. Terms of Payment- from the Sales Contract.
Product Sourcing strategy and risk mitigants- from the business plan/ Proposal.
Availability of the products-from the business plan Proposal and investigation.
Product destination- from the Sales Contract. Transaction cycle- from the date
of Sales contract to the date of receipt of export proceeds for previous
shipments. Buyer’s payment History- from the exporter’s Statement of
Account. Making these information and documents available to able gives the
credibility that will make them to consider your loan application for export
business.
The next and the fifth question states that, why are some payment
methods not attractive to banks and is there a way to make them acceptable? The
two payment methods that can make a bank to decline funding an export
transaction include Open Account (Cash against documents) and Bill for
Collection. However, if an open account transaction can be backed by either a
standby letter of credit or payment guarantee, it still retains its simplicity
but also becomes attractive for banks to fund. On the other hand, if a buyer's
bank under a Bill for collection transaction availises (guarantees) the
accepted Bill of exchange, this makes the transaction to become attractive to
banks for funding.
The second to the last question states that, which instruments can give
banks comfort when financing local supply? In country like Nigeria, where most
of the exportable items are hard and soft commodities, in an environment that
is largely unstructured, banks need comfort in order to be involve in
pre-export financing. This therefore means that any exporter that wants the bank
to finance the procurement of the commodities from their local supplier must be
ready to work with people that will secure the bank's funds through Advance
Payment Guarantee (if they need the bank to advance funds ahead of delivery).
On the other hand, if the supplier have the goods but needs assurance of
payment, a payment guarantee from the bank will ensure that he only gets paid
after the goods have delivered and the quality and quantity ascertained.
The last question that is also most important for an exporter is, how
can an exporter mitigate the risk of non-payment? This is a major risk for all
exporters around the world. The first mitigant that comes to mind is the use of
letter of credit and confirmed letter of credit. However, where this is not possible,
standby letter of credit and availization can help to secure payment under Open
account and Bill for collection respectively. If these mitigants cannot be
obtained, then a representative in form of an export agent or export management
company at the destination country will be necessary to secure payment. The
representative can follow up on payment, monitor delivery and inspection and
source for another buyer if the initial one fails to pay.
In conclusion, I will like to say that if anyone intending to go into
export business can take time to research and get more information about the
questions addressed in these series of articles, he would have successfully
created a viable business plan that will make the export business a
success.
For questions on this thought, you can reach me via
email to bayemibo@3timpex.com
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