Different choice of international trade payment

1.0 Choices for International Trade Payments

The handling of international payment is a very risky and complicated aspect of the business process for the MNEs. This is because different nations have different units and currencies that must be monitored and this makes it difficult to make payment in order countries.  As such, the main purpose is determining how to eliminate these issues and the following are the choices that MNEs have with respect to that:

1.1 Prepayment:

This form of payment involves the MNEs buyer making payment to the MNEs seller in advance. The purpose of such payment is to protect the buyer from issues that might arise as a result of credit crisis, exposure to currency fluctuations and issues with firm time purchases in the selling country or with the selling company (E-marketplace Trade and International Payment Methods, 2010).

1.2 Letters of Credit (LC):

This is a form of purchase payment issued by the bank on the behalf of the buyer to the seller in order to for the seller to release the goods through an importer for the buyer. This is of high benefit to both seller and buyer because the bank guarantees payment to the seller and reduces amount to be paid for the buyer (Methods of Payment in International Trade).

1.3 Open Account:

This is the most widely used method for handling payment of MNEs (Madura, 2008). It involves the seller sending the goods to the buyer, and the buyer making payment as contained in the bill for the seller. This is most common in cases where both parties have mutual understanding and have engaged in business previously.

1.4 Consignment:

This is an agreement based form of payment in which the seller sends the goods to the buyer but still retain the ownership until the buyers make payment as agreed in the terms. The MNEs exporter’s banks send the due amount to the MNEs importer’s bank of which the bank will have to pay at sight or per agreed date. Drafts are generally less expensive than letter of credit (E-marketplace Trade and International Payment Methods, 2010).   

2.0 Issues that affect Decisions

            The decision for payment is mainly affected by the risk factors and some of the issues faced in MNEs payments are as discussed below:

2.1 Risk Factor:

            A MNE choices payment option based on risk bearing pattern, and repayment risk is high for the importer while it is low for the exporter. It is because; the risks depend on the credit term for the exporter but risk remains for importer until the release of shipment. One account method can also be adopted in cases where creditworthiness exists as a result of previous partnership (Weiss, 2007). 

2.2 Legal and political factors:

            A number of legal and political issues such as Act, trade barriers, laws of the country and other business policies affect the decision of payment option to be used. An effective financial structure in the economy increases the use of letter of credit method and consignment method while, prepayment methods is adopted as a result of increase in financial risk (Madura, 2008).

2.3 Trustworthiness:

            This is a very important issue when it comes to payment between MNEs as it will influence the decision to adopt prepayment or open account. In cases where there is a high level of trustworthiness, chances of adopting open account are high (Weiss, 2007).   

3.0 International Trade Payment Method for China

The case of Chinese business and regulatory environment is the right example to analyze the payment options discussed in this paper. The intervention of government, slower time for release of funds, lack of transparency, and less development of the private sector as well as other factor influences the insecurity of payment in China with respect to foreign currency operations. In starting business in china, a number of options can be used by the economic, political and legal factors still affect the potential effectiveness of these methods.

The advance payment method is not effective for the buyer because it can be difficult for the buyer party to arrange such payment option because the approval of local administration is required. In any case, this is most adopted for long production goods that can create risk. Documentary collection also requires a great deal of trust between buyers and sellers that is not possible to start new business with Chinese company. This method creates risk for the exporter as it is possible that buyer may not come in to pay due to difference between contract prices and current market prices because of currency fluctuation. The collection of documentary is done with a great deal of trust established between the buyers and the sellers, and it makes it almost impossible to start a new business with Chinese companies. this is because this method creates high risk for the exporters because the buyers might not actually come back to make payment for the differences that arises from the contract price and current market price due to the differences in currency. Open credit is also uncommon in China as the Chinese MNEs buyers seek for long-term credit in order to allow them to export to China.

The most appropriate method of payment in China for MNEs as well as other countries is the letter of credit with a well-established bank as it protects both parties. The bank will make available the necessary fund for purchases to the seller and also reduce the purchase price for the buyer

References

E-marketplace Trade and International Payment Methods (2010). Retrieved November 12, 2010 from http://www.emarketservices.com/clubs/ems/prod/Payment%20Methods.pdf

Madura, J. (2008). International Financial Management. Cengage Learning.

Methods of Payment in International Trade (n.d.). Retrieved November 12, 2010 from http://trade.gov/publications/pdfs/tfg2008ch1.pdf

Weiss, K.D. (2007). Building an Import/ Export Business. John Wiley and Sons.

Getting Paid for Export to China. (n.d.). US Commercial Service. Retrieved November 17, 2010, from http://www.export.gov/china/exporting_to_china/Getting%20Paid%20for%20Exports%20China.pdf