International Trade: Key Players and Payment Methods
Key Intermediaries in International Trade
Customs Broker
A customs broker is a professional agent licensed by local customs authorities. They act on behalf of importers and exporters, preparing and submitting all necessary documentation for clearing goods through customs. This requires passing a comprehensive examination. A customs broker facilitates relationships with customs and other relevant bodies.
Freight Forwarder
An international freight forwarder acts as an agent for the exporter, managing the movement of cargo to overseas destinations. They possess in-depth knowledge of:
- Import regulations of foreign countries
- Export regulations of the national government
- Shipping methods
- Documents related to foreign trade
They advise on optimal packing methods to protect merchandise and can arrange for packaging at the port. Freight forwarders review all shipping documents to ensure accuracy and compliance.
Terminal
A terminal is an area at the end of a rail, ship, air, or truck line. It serves as a loading, unloading, and transfer point for cargo or passengers.
Port Authority
A port authority is a governmental commission that manages infrastructure such as bridges, tunnels, airports, and other facilities within a port or city.
International Trade Payment Methods
Cash in Advance
With cash in advance, exporters avoid credit risk as payment is received *before* the transfer of goods ownership. Wire transfers and credit cards are commonly used for international sales. However, this method is often unattractive to buyers due to unfavorable cash flow implications.
Letters of Credit (LC)
Letters of credit are among the most secure instruments for international traders. An LC represents a commitment from a bank, on behalf of the buyer, guaranteeing payment to the exporter, provided that all terms and conditions specified in the LC are met. This is verified through the presentation of all required documents. LCs are particularly useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s bank.
Documentary Collections (D/C)
In a documentary collection, the exporter entrusts the collection of payment to their bank. The exporter’s bank sends the necessary documents to the importer’s bank, with instructions to release the documents to the buyer upon payment. A D/C involves a draft, requiring the importer to pay the face amount either at sight (sight draft) or on a specified date (time draft).
Open Account
An open account transaction is a sale where goods are shipped and delivered *before* payment is due. While highly advantageous to the importer in terms of cash flow and cost, it presents a significant risk to the exporter. Exporters offering open account terms can mitigate risk through export credit insurance.
Consignment
Consignment is a variation of an open account where payment is sent to the exporter *only after* the goods have been sold by the foreign distributor to the end customer. Exporting on consignment carries high risk for the exporter, as payment is not guaranteed, and the goods are under the control of an independent distributor or agent. However, consignment can enhance competitiveness by improving availability and delivery speed.