,Terms of Payment,Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Terms of Payment as a Marketing Tool,Terms of Payment,Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool,Terms of Payment,Characteristics of International Payment Issues,Reduced Credit Information Lack of Personal Contact Difficult and Expensive Collections No Easy Legal Recourse Higher Litigation Costs Mistrust,Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool,Terms of Payment,Risks in International Trade,Country Risk Country risk is also known as political risk. The probability of not getting paid by a creditor, because the creditors country has: Insufficient foreign exchange reserves. Political risk can also mean the probability of nationalization of a firms subsidiary by the host country.,Risks in International Trade,Commercial Risk The probability of not getting paid by a creditor, because this creditor does not have the funds to pay the debt or because the creditor refuses to pay the debt. Exposure The relative consequences of a bad-debt risk for an exporter; the risk of a $50,000 loss would represent a greater exposure for a small exporter than for a large exporter.,Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Procurement Cards TradeCard Terms of Payment as a Marketing Tool,Terms of Payment,Alternative Terms of Payment,Cash in Advance Open Account Letter of Credit Documentary Collection,Alternative Terms of Payment,Table 7-1: Advantages and Disadvantages of Several Terms of Payment,Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Terms of Payment as a Marketing Tool,Terms of Payment,Cash in Advance,Definition In a Cash in Advance transaction, the exporter requests that the customer provide payment in advance, before shipment of the goods can take place. It is the ultimate “risk-free” alternative for the exporter. In a Cash in Advance transaction, the risk is completely transferred to the importer.,Cash in Advance,Applicability This method is only justified in rare cases. It could be used when the importer is perceived as being very high risk (commercial or country risk). It should be avoided.,Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Terms of Payment as a Marketing Tool,Terms of Payment,Open Account,Definition In an Open Account transaction, the exporter conducts international business in a manner similar to the way it conducts business domestically. The exporter ships the goods, accompanied by an invoice, and expects the importer to pay within a defined time period (30-60 days).,Open Account,Applicability The exporter is confident that the importer will pay (e.g. long-standing business relationship). The exporter is competing with companies that offer Open Account terms. The exporter wants to create goodwill. In cases where the exporter is unsure of the importers credit, the exporter can use credit insurance.,Open Account,Credit Insurance An insurance policy under which commercial risk is covered. The insurance company bears the risk of non-payment by the importer, deducting a slight percentage of the receivable. Credit insurance does not cover political risk, unless the exporter has explicitly asked for additional political coverage that is obtained through the Ex-Im Bank.,Characteristics of International Payment Issues Risks in International Trade Alternative Terms of Payment Cash in Advance Open Account Letter of Credit Documentary Collection Terms of Payment as a Marketing Tool,Terms of Payment,Letter of Credit,Definition A Letter of Credit is a document with which the importers bank promises to pay the exporter if the importer does not pay.,Letter of Credit,Issuing Bank The bank providing the Letter of Credit to the importer. The bank that will pay the exporter when it provides all the necessary documents, should the importer be unable to pay. Advising Bank The bank that determines whether the terms of the Letter of Credit offered by the Issuing Bank are appropriate. The Advising Bank is generally the exporters regular bank. In some cases, the exporters bank will delegate this role to another bank which is more experienced in interna