Essay Sample on International Payments in Global Trade: A Necessity for Growth

Introduction

International ways of payment are mainly used in global trade. The global market has become so big in the current time, and every country is trying to get the best out of it. Some individual traders are in the international trade that depends on international modes of payment after a service delivery or a business transaction (McGaughey, 2006). International trade is very crucial in a country's growth or development, that is why every country is coming up with measures and regulations that are favorable to almost every international trader to do business with them. The exporters use standard modes of payment in worldwide trade to be in a better position to win sales and be successful in the market (McGaughey, 2006). In every export made, the exporter expects to be paid on time and in full using the appropriate methods, which helps in reducing the risks that might be occurred during payment while also making sure that the needs of the buyer are well taken care of (McGaughey, 2006). In my research, I have involved articles that talk about the international market, the global methods of payment, mostly on how to choose which method of payment to use at every trade. All the scholarly reviewed articles had great information that related to others that I will be stating throughout this journal. I will major in international trade and global market because this is where the international methods of payments mostly apply and elaborate on various ways of international payments.

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International trade payment brings a wide range of risks, which leads to being uncertain about the payments between the person exporting and the one importing (the seller and the buyer). According to the exporters, a sale is considered a gift until when the full payment has been made (Laryea, 2001). The importers, on the other, think a payment to be a donation until the full payment is completed. There are several ways of payment in the universal trade, but traders choose the method that is suitable and favorable to them at any given time. The various methods of payment are Cash In Advance, Letters Of Credit (Irrevocable), Collections (At Sight, or Against Acceptance), and Open Account. Different scholars define the methods and state the best method of payment to use in international trade and which traders mostly prefer (Laryea, 2001). The listed above are considered to be the most popular across the globe.

Cash-in-Advance

According to most traders, the most preferable is the cash-in-advance because it prevents them from any risk of non-payment of goods. After all, the buyer has to pay for the goods before they become the owners. To the exporter, this is the preferable mode of reimbursement during global trade, but it does not apply in the same way to the importer because there is the risk of paying for goods and they do not reach to them or reach them in an improper state that they had expected(Holliday,2008). This method needs trust between the seller and the buyer. Even with that, it has been stated and agreed upon as the least risky method of payment in international trade. In every transaction between the buyer and the seller, there is the agreement that should be followed and the standards that should be reached that should be held accountable in case of a breach of contract (Holliday, 2008). There is an arrangement that is called "cash against the document," where the bank gets instructed by the exporter to give the importer title and shipping documents which is also referred to as "see the document of title" after he or she has made full payment of the draft or the accompanying bill of exchange. This process ensures that everybody gets what is there to contention (Holliday,2008).

To be able to know who one is dealing with and their history of payment, there is the trade payments that facilitate the performance by issuing information about companies and their likelihood of quickness of paying forthcoming bills by viewing how they have been transacting their business with other traders (Laryea, 2001). This is on the bases of aging, the number of dollars, and trade. Some documents are required for either export or import and the exporter, and the importer must have them to trade. International trade is significant in the economy of a country, and each one of them has a set of rules, regulations, and requirements that enables one to become an international trader (Laryea, 2001). Every country has rules that will benefit them and help them to be at the top of the market and be able to make profits and gain from them, or to avoid exploitation (Laryea, 2001).

The international payments have a procedure in how they are done, and there is a process that has to be followed. There is the bankers draft and bills of exchange (Laryea, 2001). A statement of exchange is made from the banks by an individual who is an order that is drawn. It can also be done through a third party where the individual asks the banks to make the payments on his behalf (Laryea, 2001).

Irrevocable Letters of Credit

There is another means of international payment, which is the Irrevocable Letters Of Credit .this is a financial tool that the banks use to guarantee the obligations of buyers to the seller. Irrevocable also means irreversible (Alavi, 2016). This means that the content of the credit paper cannot be tampered with or changed unless all the parties that were involved agree to it. They irrevocable letters of credit enhance the trade transaction and make the international trade market a safer place to transact business because they reduce the risks that come along with. It is a guarantee to the seller of payment of his sold goods or services just in case the buyer does not pay (Alavi, 2016). The seller has the assurance of getting paid for his or her services. This mode of payment is different from the line of credit, which is a loan that the bank's credit to a person. One can get an irrevocable letter of a trade by getting in touch with their bank, which costs one percent of the amount that is being offered in the contract(Alavi, 2016). This letter boosts the confidence of parties while doing business as everybody is guaranteed to get their dues. Traders use this form of transaction, but it still cannot be compared with cash in advance, which is popular among the traders (Alavi, 2016).

Collections (At Sight, or Against Acceptance)

This is yet another form of international trade that is also common. Documentary collections are also cash on sight (SADILEK, 2018). The seller in this form of payment asks his banks to send the documents that are related to the goods that are being exported, requesting the latter to forward the document to the buyer so that payment can be made (SADILEK, 2018). Collections of the documentary are the process by which the bank of the exporter of the goods collects payment or money from the bank of the importer for the documents of the goods or materials that had been exported (SADILEK, 2018). In this case, the bank is the third partner, and it acts as an agency for collecting money for the exporter. The exporter doesn't have to deal directly with the importer. In this form of payment, the amount that is stated on the document on the sight of the shipment according to document against payment and on a specific stated future date according to document upon their acceptance (SADILEK, 2018). This method is safe for both the buyer and the seller as it reduces the risk of not getting paid though there are cases of that kind. This form of payment might take a while compared to the first form of payment that I discussed earlier, which is cash in advance (SADILEK, 2018).

Open Account Transaction

The other form of payment in international trade is the open account transaction. It is also one of the common means of doing business where the goods are exported or shipped before the payment has been done (Malindretos, 2018). This is usually between the periods of thirty, sixty, or ninety days. The importer is the one who benefits most from this transaction in terms of cost and cash flow, as well as being very risky to the exporter because payment might be delayed or never get paid at all. Traders do not prefer this method because it is very tricky unless one has assurance or have a good history with the buyer (Malindretos, 2018).

Conclusion

International trade is a big industry, and one has taken the right steps and choices in business transactions, which mostly entails the means of payment. The trader might choose whichever means to use according to the mode of business and the agreement between them. All the fees have a risk with them, just that some are less risky than others, and some have assurance, and others don't.

References

Laryea, E. T. (2001). Payment for paperless trade: are there viable alternatives to the documentary credit. Law & Pol'y Int'l Bus., 33, 3.

Pan, X., Gunasekaran, A., & McGaughey, R. E. (2006). Global e-business: firm size, credibility, and desirable modes of payment. International Journal of Business Information Systems, 1(4), 426-438.

Holliday, C. L. (2008). U.S. Patent Application No. 11/986,428.

Alavi, H. (2016). Documentary Letters of Credit, Legal Nature and Sources of Law. Journal of legal studies, 17(31), 106-121.

HINCICA, V., & SADILEK, T. (2018). The Use of Selected Payment Instruments by Companies Operating on Foreign Markets. Journal of Applied Economic Sciences, 13(1), 47.

Arize, A. C., Andreopoulos, G. C., Kallianiotis, I. N., & Malindretos, J. (2018). MNC transactions foreign exchange exposure: An application. International Journal of Economics & Business Administration (IJEBA), 6(1), 54-60.