|
The most secure method of trading for exporters and, consequently the least
attractive for buyers. Payment is expected by the exporter in full prior
to import goods being shipped. As one might imagine, having covered the two extremes
on the Payment Risk Ladder, commercial decisions have to be made and this
usually results in selecting one of the middle rungs of the ladder. This
is where banking products such as Bills for Collection and Letters of Credit
come in to play.
This trade payment method is prevalent for transactions where the seller
or exporter has a much higher bargaining power than the buyer or
importer. Such payment method may also be employed where the buyer or
importer may not have the ability to open letters of credit
that is formally called Documentary Credits through their bank/s.
It is also possible that the buyer is a cash rich company and therefore wants to avail a cash discount from the seller.
Obviously, the inherent risk in the transaction is borne by the buyer which involves performance risk on the exporter as well as country risk where
global trade is involved. In this case risk implied for the buyer could be an established relationship with the seller,
exporter or supplier, or any mutual dependence between the buyer and the seller. Bank Guarantee from the seller covering the performance risk could also provide comfort to the buyer.
The schematic below elucidates
"Advance Payment" transaction flow :
|
