The Role of Trade Finance in Working Capitalthe accepted bill’s term, there is still a risk that the importer will refuse to honour the bill.
In these circumstances the exporter will need to pursue payment through the courts in
the importer’s jurisdiction. In effect, the exporter’s security is dependent on the likelihood
of the importer’s jurisdiction honouring obligations under a bill of exchange if the importer
decides not to pay.
Despite passing across the documents of title against receipt of the bill, it is still
possible for the sales contract to have a reservation of title clause, which then provides
potential access back to the goods in the event of any non-payment.Delivery against acceptance pour aval
It is possible for the exporter to strengthen its position under collection against
acceptance. This is to use delivery against acceptance pour aval. Under avalisation,
the importer’s bank must guarantee an accepted bill for payment before documents
are released to the importer. Under these circumstances, the exporter is exposed to
the importer’s bank, which must then be assessed for counterparty risk. The fees for
avalisation are based on a percentage of the bill amount, and are usually paid by the
importer, although this will depend on the nature of the relationship between the importer
and exporter.Risks and advantages for buyers/importers
Trade using documentary collections is
slightly more onerous for the importer,
compared with open account trading. The
importer’s main risks are that the goods are
damaged in shipment, or that the shipment
was incorrect, or that the goods are detained
by customs. The importer will usually be able
to appoint a third party to inspect the goods
prior to making payment, although this should
be agreed with the exporter as part of the
terms of the collection.
Preparation of the documentation is central
to the process. Negotiation of terms whilst the
transaction is being agreed will ensure the
documentation is as accurate as possible,
reducing the risk of confusion or dispute
later. At this stage the importer needs to be
confident in its ability to meet the requirements
of the collection process. This adds cost to
the procurement process, as resources will
need to be committed to the scrutiny of the
appropriate documents and to ensure any
relevant import licences are in place. Note
that the latter process would still need to be
followed on an open account transaction.
As with open account trading, the importer
can still defer payment (using the exporter
as a source of finance) by using collection
against acceptance, rather than collection
against payment. Offering an acceptance may
make it easier for the exporter to raise finance
in the period before the importer pays, which
should be a consideration for an importer
looking to strengthen its supply chain.Risks and advantages for sellers/exporters
As with open account trading, the exporter
faces a risk of non-payment after the delivery
of the goods, as it can still be difficult to get
cash in the event of counterparty failure.
Collection against payment offers greater
protection than collection against acceptance.
The exporter still has a counterparty
credit risk in the case of a usance collection.
However, it will have evidence of a debt,
which will normally make it easier to pursue
through any local legal system.
As with other payment terms, there is a
country risk. In this context the major risk is
that it can be difficult to pursue non-payment
in the importer’s jurisdiction. Even if it is
possible to pursue non-payment through the
local courts, this will take time and have an
impact on the exporter’s cash flow.
It is important that the exporter is aware
of the appropriate local rules. For example,
some countries apply stamp duty on bills of