Q1. Explain how Letter of Credit acts as an appropriate mode of payment for both exporter and importer.
Answer : Any exporter will perhaps tell you that the most important aspect in the export-import business is finding a payment mode which is secure and safe, and all the more, acceptable to both parties. I strongly believe that it is of utmost importance for each and every exporter to have extensive knowledge of export payment mechanisms and extend credit cautiously. Whenever I’m asked as to which I believe is a relatively cheap and uncomplicated method of payment for both importers and exporters, I invariably go with Letter of Credit.
Although I always advocate Letter of Credit, with the world turning into a digitally connected global village, both the buyer and seller have, however, found various means of transacting commensurate with their needs and comfort.
For newbies to the export-import business, I would like to introduce Letter of Credit (also known as L/C, LC, or LOC) as a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. L/Cs are ideally used in international transactions to ensure that payment will be received by the seller.
The reasons why I feel a L/C is a very important tool for export-import transactions is primarily due to the factors involved in international dealings such as distance, different laws in respective countries and absence of face to face interactions between the buyer and seller sitting in two far-flung areas on the globe. It is a fact that the exporter or importer, who are located in different countries, may not know each other. As such many a time the problem of buyer’s creditworthiness hampers trade between the two.
At various platforms in the past, I have discussed with several exporters on whether L/Cs are indeed the safest and secure payment mode. They opined that being an exporter, L/Cs amount to guaranteed payment upon presentation of certain documents, thus reducing production risk, for situations when the buyer cancels or changes his/ her order.
Moreover, they felt that it gives them the ability not only to structure the delivery schedule according to their interests, but also in obtaining pre-export finance to finance the production or the purchase of the goods.
Perhaps the single-most advantage as a seller or exporter in using L/C as a payment mode is that the buyer cannot refuse to pay due to any complaints about the goods and the buyer has to raise his/ her complaint or claim separately from the Letter of Credit. This, I think, gives the exporter a significant advantage in resolving such issues related to delayed payments.
However, many importers whom I have met were unanimous on the benefits of L/Cs because the bank acts on behalf of the buyer who is the holder of Letter of Credit by ensuring that the seller or the exporter will not be paid until the bank receives a confirmation that the goods have been shipped.
Having said that, several exporters and importers have been successful too without Letter of Credits. Cash in advance, documentary collection or draft, open account, and other payment mechanisms are also popular amongst the exim community.
Since I always argue for L/Cs as the safest and more secure payment mode, I would definitely like readers to share their views on: ‘Do you really think L/C is the safest and secure means of transaction?’ or ‘Which payment method do you mostly use?’ or ‘What according to you is the safest means of export-import payment method?’
Q2. “International distribution decisions are critical decisions”. Substantiate.
Q3. Discuss the EPRG orientations and give the differences between international and domestic marketing.
