Export financing is not only critical for the individual Exporter but also for the country as it directly affects the balance of payments of the exporting country.
The Exporter has various issues to consider:
The credit worthiness of the Buyer in the foreign country
Cancellation of orders in the middle of production
Dilution arising from delay in shipment.
Whether the quality required by the End Buyer can be met by the factory.
The mitigation of the payment risk
Procurement of the raw materials
The payment risk can be mitigated by:
Receiving some down payment before starting production. This generally varies from 10% to 30% of the order.
Order to be backed by Letter of Credit. While accepting Letters of Credit, the following should be considered: Quality of the issuing bank. b. Should be irrevocably and generally at sight payment terms. c. What currency? d. Whether the documents required to be paid under the Letter of Credit are simple and straight forward. Generally documents required are: Invoice, Packing List, Bill Of Lading, sometimes Inspection Certificate issued by a bonafide third party. There should be no document required that is under the control of the Letter of Credit opener or the issuing bank.
Documents Against Payment (DP). Here the Exporter has control over the goods till the importer’s bank pays the Exporter. Once the Exporter is paid or guaranteed payment, the Bill of Lading, the vital title document, is handed over to the Buyer.
Documents Against Acceptance (DA). The acceptance of the draft or accepting the obligation to pay the Exporter can be undertaken either by a bank or the Buyer itself provided the Exporter finds the Buyer a credit worthy entity.
Open Account. Here the Exporter takes full risk on the Buyer and hands over the goods based on the Buyers promise to pay. Should only be done selectively.
Currency of payment by the Buyer is important as the Exporter might need to hedge this currency risk. For instance if the Exporter’s cost is in local currency and the payment will be made (receivable) in another currency such as dollars or Euros, the Exporter takes significant currency risk as the dollar or euro devalues against the local currency. Similarly if the Exporter is buying some of the raw materials in say Dollars and selling the finished product in Euros, the Exporter is taking currency risk if the Euro devalues against the Dollar.