Free Online Course in International BusinessDocumentary CollectionsDocumentary collections allow a buyer to import goods at the risk of the seller. Buyers often pay for the documents when the arrival notice is received. The buyer having paid for the documents, the bank will release the negotiable documents to this buyer, thus allowing for the release of the goods by the carrier. Documentary collections can also be presented with an extended payment bank draft. This form of financing assigns greater risk to the seller because once the buyer accepts responsibility to pay at maturity by signing the bankdraft, the documents are released to the buyer. The title to the goods passes to the buyer, and the only recourse to the seller if the buyer does not pay at maturity is to seek legal recourse. Doing so is costly and time consuming for the seller. The buyer could provide the seller with a guarantee of payment from his bank by transferring the responsibility for the payment from the buyer to his bank. This action occurs if the buyer's bank, relying on the credit facility they have with the buyer, avalizes the draft, thereby assuming responsibility for the payment at maturity. It is important for the seller to analyze a buyer carefully before extending credit terms under a documentary collection.Bank CheckPayment by check by an overseas buyer provides higher risk for a seller. Checks drawn on foreign banks do not clear through the Federal Reserve Bank. These items must be presented directly to the paying bank and can take up to eight weeks or longer to clear (clearing of checks is different in every country throughout the world). The general desired form of payment should be by wire transfer into the seller's account at the designated bank. The second form is to accept a check drawn on a United States bank in US dollars, which allows you to collect your US dollars through the Federal Reserve Bank under laws of the United States clearing laws. Checks drawn on foreign banks require collection procedures through the banks and can easily be returned for insufficient funds or stop payment. The collection of a foreign check also takes so much time that the seller will have difficulty in applying other collection procedures against a buyer in a foreign country.Personal ResourcesStartup companies have difficulty raising money until some performance history is created. Prior to the establishment of solid financial data, a startup is dependent upon the personal resources of the owner or investors in the company. Private investors expect to have a return on their investment and the ability to sell that investment at a future date. The owners raising capital from private investors give up a portion of their business in the form of an equity interest to the investor, which dilutes the holdings of the existing owner(s) of the company. Banks always expect owners and investors to step in with additional funding first before increasing credit lines in emergency situations.Bank FinancingLetters of CreditLetters of credit are often used to finance purchases in a foreign transaction. Letters of credit are the guarantee of payment by the buyer's bank (not the buyer) to pay provided the terms of the letter of credit are strictly met. Letters of credit can provide extended payment terms and still provide a guarantee of payment by the buyer's bank, by accepting to pay the draft at maturity. This action is the source of a banker's acceptance, which draws its name from the accepted draft. A banker s acceptance is a method of financing that banks can use to provide customers with short term (six months or shorter) financing for trade transactions. A banker s acceptance is a time draft drawn on and accepted by a bank. The bank indicates its commitment to pay the stated amount of the draft on a specified future date by signing the draft on its face and thereby accepting it. The draft may then be sold to an investor for a money market rate of return based on the credit risk of the bank. Acceptances may be less expensive than more traditional trade financing methods.Banker's AcceptancesAcceptance financing has been used for decades as a form of bank loan. The ability to fix rates for periods of up to 180 days protects a borrower from adverse movements in interest rates up to six months. Banks offer banker's acceptances in a wide range of maturities to match customers' sales cycles and payment terms. Traditionally, importers used banker's acceptances to finance imports into the United States. Today acceptance financing is used to finance a wide range of activity such as imports, exports, domestic shipments, domestic purchases, and commodity warehousing of readily marketable products.DiscountingBanker's acceptances provide a deferred payment option for a buyer but little benefit for a seller. Banker's acceptances can be discounted to the seller freeing up funds to the seller and providing an additional income opportunity for the discounting bank. The fees and charges for discounting banker's acceptances can be paid for by either the buyer or the seller. The accepted draft is discounted to the seller who receives a discounted amount from the bank discounting the draft. If the buyer agrees to pay for the discount fees and charges, the seller will receive the full amount of the draft, which is the reason it is important to establish who is responsible for these fees and charges in the negotiation process prior to fixing the product price. It is important to note that discounting can be done by either the buyer's or the seller's bank. It is possible that neither will be interested in discounting the draft, but in most cases both are available and should be confirmed before the transaction is finalized between the buyer and the seller. Whether the buyer, the seller, or their banks furnish the financing under letters of credit depends on a number of factors:• relative negotiating position of the buyer and the seller • availability of financing in the buyer's and seller's countries • relative interest rates in the buyer's and seller's countries • relative need of the buyer and seller for financing
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