Countries world-wide have traded among themselves for over 2000 years
using wide-ranging methods of settlement. Exporters of goods naturally
seek security of payment, whereas importers endeavour to ensure that they
receive precisely those goods they have contracted to buy and for which
they insist on correct documentation for customs clearance purposes.
Raw materials, oil, liquid gas, coal, manufactured goods, soft commodities,
fresh and frozen foods all form just a part of the vast quantities of freight
being carried every day by air, sea, road, rail and inland waterways. To
those must be added the export of technology and industrial and
manufacturing systems for the introduction and modernization of industry
in less-developed and third world countries.
Advances in technology have improved transport by sea and air enabling
carriers to move goods with ever-increasing speed and safety. When an
importer and exporter enter into a contract to buy and sell goods they set
in motion a series of activities involving numerous support services
provided by forwarding agents, road transporters, railway operators,
shipping companies, banks and insurers; each is an important link in the
movement of goods from one country to another. The principal operators
in international trade combine their respective skills to ensure the
successful completion of transactions and the reduction or elimination of
those risks which are ever-present in cross-border trading.
Depending upon their relationships with one another, some traders may be
prepared to deal on open account where the exporter despatches goods and
documents direct to his buyer and awaits payment in due course. However,
where levels of experience are less well-established, exporters can select a
method of settlement in keeping with their specific requirements.
Most international trade transactions are financed at some point,
principally by banks specializing in this activity, particularly in protecting
against risk during all stages of transport up to final destination.
For the exporter, those risks are non-payment or late payment which both
seriously affect cash flow. The importer, on the other hand, faces the risks
of non-delivery, short delivery and delivery of substandard goods.
In addition, where the importer or buyer is on-selling the relative goods to
a foreign buyer, he runs the risk that incorrect or faulty documents from the
overseas supplier may be rejected at final destination.
Those specializing in finance have devised a range of products and tech-
niques to provide trade operators with varying degrees of protection against
commercial and financial risks and to ensure settlement of contracts.
The bill for collection is by far the most widely used and relatively
inexpensive method of settlement. It involves the exporter in despatching
his goods, raising the documents and handing them, together with a bill of
exchange, to his bank for collection. The documents are then sent to a
foreign bank for payment or acceptance by the buyer.
This method is not without risk, for if the importer fails to pay or accept the
bill of exchange, the exporter’s goods may be left stranded in a foreign port.
Although there are certain facilities available with foreign banks to reduce
the risk of non-payment, exporters who are reluctant to accept the risks
involved in collections will opt to use the safest known method of
settlement in international trade.
Known as the irrevocable documentary credit this instrument is capable of
meeting the most stringent requirements of exporters and importers. It is a