Foreign payments

6 important questions on Foreign payments

Outside your own currency area, we distinguish two situations. Which?

  • Countries with set exchange rates that seldom change value
  • Countries with floating (fluctuating) exchange rates

What are factors that determine your choice of payment method?

  • Size of non-payment risk
  • Cost of payment method
  • Length of the payment process
  • Quality of the relationship
  • The complexity of the payment method
  • The distance to the buyer
  • The culture of the country
  • The market (competition)
  • The political and economic situation in a country
  • The requirements of banks and insurance companies

The "hassle" with foreign payments is probably the most challenging part of the export experience. Why?

- Different procedures
- Higher risks
- Different attitudes t payment 
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What are the 3 most commonly used methods of foreign payments?

- Cash payment (costs less than other forms of payment)
Cash in advance (you pay before shipping the goods)
Cash payment after delivery

- Documentary draft (when the buyer and seller do not know each other very well) 
Exporter sends documents to his bank,his bank sends documents to bank importer, after paying the importer gets the document (ownership document) 

- Letter of Credit (L/C) 
With a L/C the buyer's bank promises to pay the exporter, but only if the exporter complies with all the terms and conditions of the letter of credit. 

What is currency hedging?

Currency hedging refers to a strategy that tries to minimize the exposure to exchange rate fluctuations, thereby minimizing the uncertainty of future transactions done in a foreign currency and providing some stability to earnings and cash flow. 

What are the types of currency risks?

1. Transaction risk: refers to actual conversions of cash flows from one currency to another, and the extent to which exchange rate changes will affect a company's cash flow. 
2. Translation risk: is more of an accounting issue, and refers to the impact of exchange rates on earnings and balance sheet items when consolidating financial statement from foreign subsidiaries. 
From a business standpoint, transaction risk is more relevant. 

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