Risks and Post-Shipment Finance
Specific risks are associated with import transactions in international trade. For instance, the purchased goods may not meet the stipulations in the contract of sale. This occurs because importers seldom have the opportunity to inspect the goods before they are sent to their destinations. If an arbitration procedure to secure damages does not exist, importers may be forced to seek legal redress.
Sometimes, the purchased goods may not arrive within the specified timeframe. The specificity of the contract sale regarding the delivery date is essential because it provides the importer with clear legal grounds to refuse the items. The loss or damage of goods in transit can be addressed through marine insurance. Import licensing and tariff quotas apply to specific categories of imported goods. Banks do not traditionally check import licenses, so importers must ensure that all the required licenses are updated. Finally, financing for imports often runs from the time of shipment to when the final buyer accesses the goods.
Methods of Payment
Agreements between the parties involved determine the payment methods between importers and exporters. The first is clean remittance in prepayment of goods, whereby the importer remits payment at the time of order placement or shortly before the goods are shipped. The second payment modality is documentary credits, where banks issue irrevocable credits in a predetermined currency. The third modality is a documentary sight bill of exchange, where documents are presented against payment. It is used when a supplier grants credit to the importer for the airmail transit time.
The exporter gives their bill of exchange and other documents to a bank with instructions on settling the transaction. A documentary term bill of exchange refers to a payment modality in which documents are presented against the importer’s acceptance. It is used when the supplier grants terms and the importer accepts a term bill. Finally, a clean remittance after a buyer receives goods is used when a buyer settles payment after the goods have been shipped at a time stipulated by the contract of sale between the involved parties.
Medium and Long-Term Finance
Importers of capital equipment from international exporters often use medium and long-term financing options. Medium finance is defined as financing provided for six months to five years, while long-term financing often stretches longer than five years. If a buyer of capital equipment cannot meet the financial obligations required in the transaction, it is necessary to obtain financing for a specified duration. Buyers or suppliers may arrange financing through organizations similar to the Export Finance and Insurance Corporation, which provides support in various ways.
The importer is often expected to settle a portion of the purchase price, usually around 20%, before the equipment is shipped. The balance is then settled depending on a finance arrangement that includes repaying accrued interest in six-monthly intervals. It is worth noting that there is a significant degree of exchange risk when payment is made in a foreign currency over a prolonged period. Currency fluctuations may adversely affect the cost of the equipment.