You have just met with the director of marketing for a small manufacturing compa

Question

You have just met with the director of marketing for a small manufacturing company. She has just received an order from a retailer in India and would like to figure out how to ship to the  buyer without entailing any risk in terms of getting paid for the order. Explain to her what the most common form of export arrangement is best in terms of minimization of risk for the buyer and the seller. An outline of the different steps in the transaction will get you maximum points! (This involves two banks, the exporter and the importer and a number of different documents.)

Explanation / Answer

Most common risk associated with export is credit risk. As transaction is taking place between two parties of two different countries, there is a risk associated with it. Importer may fail to pay in time. So a guaratee is required to get the payment in time. Steps are as follows:

1. The exporter will request Importer for a letter of credit. It is a document issued by the banker of Importer. It provides guarantee to pay the amount on behalf of Importer. At the time of payment, importers Bank will deposit ther amount in the account of exporters bank situated in their country.

2. On receipt of this request, Importer will go to its banker and will apply for an International Letter of credit. He will provide necessary documents and informations to bank for such transaction. Bank will ensure that importer should have adequate money in its bak account on payment date. If required bank will set aside the required money from its account. No withdrawal will be permitted from the required balance.

3On issue of of LOC, bank of importer will charge a commission ad will debit the account of Importer. Importer will send this LOC to exporter before the materials are delivered.

4. On the date of shipment, exporter will load the materials for exporting it to necessary party along with required documents. Usually Export is made through ship or Air. A copy of all such documents will be sent to the banker of Importer through the banker of exporter banker for processing payment.

5. On arrival of materials in Importers country, all documents related with such goods will be at the custody of port authority/airport authority. Intimation will be sent to banker and importer by them for arrival of materials.

6. Then importers banker will send the document to importer for acceptance. Without this acceptance payment will not be processed.

7. Importer will check the containts and authenticity of the documents and return it to banker accepting the delivered materials for payment.

8. Now banker will transfer the money to Exporters bank and send the relevant documents to Importers. Importers will produce them to the port authority and will take the delivery. Exporters banker will credit the received money in exporters account.

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