Chapter Nine
Payments and Collections
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Chapter Objectives
 To appreciate how international business activity gives
rise to a variety of payment and collection issues
 To learn about the different forms of payment in
international business
 To understand the trade-off between risk and return for
various forms of payment in international business
 To learn about collection challenges in international
business
 To understand the role of foreign currency in making
and collecting payments
 To appreciate the public and private agents who help
companies manage their payments and collection cycles
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Introduction
 International companies rely on global
production and supply chains to do business
in different nations
 Involvement in international business opens
up a variety of payment and collection issues
 Potential problems involving payments and
collections include:
• Differences in currencies
• Management of payments and collections
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Introduction
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A Point of Perspective
 Communications and software innovations give managers
many tools to transform payments and collections from a
tedious obligation of doing business into a powerful source
of revenues and international competition
 Globalization obligates companies to impose a strategic
perspective on their ideas of managing, financing, and
controlling payment and collection activities around the
world
 Innovative views of the payment and collection process
can lead to terrific outcomes such as:
• Minimizing financial costs
• Reducing the size of warehouses and inventories
• Reducing overhead associated with managing
inefficient practices in credit and payables
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A Point of Perspective
 Managers can initiate a strategic perspective by speaking to the
following points as they design their payment and collection
systems:
 The period of financing
• The need for financing to make the sale
• The cost of different methods of financing
• The capacity for E-finance
• The risks of financing the transaction
 In sum, buyers and sellers press each other for payment and
collection terms that favor their individual positions
 International traders must devise prudent financing policies
that both satisfy their payment and collection standards and
position them to translate their policies into an advantageous
strategic relationship
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Forms of Payment for the
International Trader
 Financing plays a key role in virtually every international trade
 Over the years, exporters have developed several financial methods
to improve the odds that they get paid:
• Cash in advance: disfavors the buyer
• Letter of credit: essentially, a loan from a bank
Commercial bill of exchange: instructs the importer to forward
payment to the exporter
• When an exporter requires a letter of credit, the importer is
•
responsible for arranging it at the importer’s chosen bank
Common types of letters of credit include:
Confirmed letter of credit:
guaranteed by both the exporter’s
bank in its home nation and the importer’s bank in the country of
import
Revocable letter of credit: can be modified by the issuing bank
without approval from either the exporter or importer
Irrevocable letter of credit: cannot be canceled or changed in any
way by a single party without the consent of all parties in the
transaction
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Forms of Payment for the
International Trader
 Buyers and sellers use documentary and drafts as forms of payment to


further protect their respective interests:
• Documentary drafts: stipulate that a bank will make payment on
the material basis of formal documents
Bill of lading
Consular invoice
Bill of exchange
• Sight drafts: drafts that are paid upon presentation
• Time or date drafts: drafts that are paid at a later time
An exporter occasionally may sell on an open account, in which it
extends unsecured credit to the buyer
• Open accounts carry lots of risks
There are a variety of alternative forms of financing that a company can
use to trade internationally
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Forms of Payment for the
International Trader
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Collection Problems in
International Trade
 In a perfect world, sellers would
promptly ship the right product and
buyers would promptly pay
• In international trade, perfection seldom
comes to pass
• Dealing with collection problems is difficult,
costly, and time consuming
• International traders should follow universal
guidelines of effective collections
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Foreign Currency
 There is a fundamental difference between making payment in the
domestic market and making payment abroad
• Foreign exchange: refers to money denominated in the
currency of another nation or group of nations
• Exchange rate: the price of a currency
• The traditional foreign exchange market consists of:
Spot markets: transactions involving the exchange of
currency the second day after the date on which the traders
agree to the transaction
Forward markets: transactions involving the exchange of
currency three days or more after the traders agree to the
transaction
Swap markets
• Other key foreign exchange instruments include:
Currency swaps
Options
Futures
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Foreign Currency
One of the risks associated with foreign trade is
the uncertainty of future exchange rates
• To avoid this risk:
Quote prices
Require payment in U.S. dollars
Most foreign exchange transactions take place
within the realm of the international department
of commercial banks
There are a number of reasons why companies
use the foreign exchange market
•
•
Import and export transactions
A multitude of different financial transactions
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Foreign Currency
The foreign exchange market is made up of
many different players:
• Exporters
• Importers
• Companies
• Governments
• Transnational institutions
Gradually, foreign exchange transactions are
moving onto the Internet
•
•
In October 2000, only about 12% of foreign exchange
trading was done electronically
Projections suggest the volume will grow to 75% by
2002
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Sources of Help for International Traders
 Companies typically have many options from both
private and public sectors to help them figure out the best
financing options
• Government agencies:
Ministry of International Trade and Industry
The Export-Import Bank (Exim Bank)
Small Business Administration
Overseas Private Investment Corporation (OPIC)
• Export intermediaries:
Export management company
Export trading company
• Commercial banks
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Sources of Help for International Traders
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