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Chapter 1:
Key Issues in International Payments
Edward G. Hinkelman
International Payment 4th Edition
World Trade Press
 Contents

1. Who Bears the Credit Risk?

2. Who Finances the Transaction?
3. In What Currency will Payment be Made?
4. What are the Political and Legal Risks?
5. Who Will Bear Transportation Costs and Risks?
6. What Are the Costs of Each Method of
Financing and Payment?
7. Special Cases

Chapter 1: Key Issues in International Payments 2

 Who Bears the Credit Risk?

The buyer would prefer to obtain easy, extended, and

inexpensive (preferably free!) credit terms.
Credit gives the commercial buyer the opportunity to
resell the goods before having to pay for them.
In many instances, the buyer will have a market for
goods but not possess sufficient working capital to make
an outright purchase and payment prior to their resale.
Credit makes many such transactions possible.

Chapter 1: Key Issues in International Payments 3

 Who Bears the Credit Risk?

International transactions are not as stable, secure,

transparent, or reliable as domestic transactions and
many things can happen between the time of the sale
and the expected time of payment.
The seller will always prefer to be paid immediately;
either at delivery or even prior to delivery.

Chapter 1: Key Issues in International Payments 4

 Who Bears the Credit Risk?

• Prefers that the seller bear the

credit risk and wants to make
BUYER/IMPORTER:
certain that he receives the
goods once he has paid

• Prefers that the buyer bear the

credit risk and wants to make
SELLER/EXPORTER:
certain he receives payment for
goods shipped

Chapter 1: Key Issues in International Payments 5

 Who Finances the Transaction?

In an international transaction it may take from several

weeks to several months for merchandise to find its way
from the warehouse of the seller to the warehouse of the
buyer.
Goods must be prepared for export through different steps:
trucked or sent by rail to the port, export cleared,
shipped to another port, possibly transshipped to the final port,
warehoused awaiting customs clearance, inspected, customs cleared,
sent overland to the final destination, and
finally inventoried at the buyer's warehouse.
The seller has already made a substantial investment in
manufacturing the product and doesn't feel that he should
bear the brunt of the costs of financing.

Chapter 1: Key Issues in International Payments 6

 Who Finances the Transaction?

The buyer knows that it may be one or two months

before he even sees the goods in his warehouse, another
one or more months before he sells the goods, and
another one or several months before he gets paid from
his customers.
→ Why should he pay for goods or pay for the financing of
goods he doesn't even have in his warehouse?
→ Both buyer and seller would wish that the other party
finance the transaction and pay for the costs of financing,
the realities are that both buyer and seller typically need
to compromise somewhat in order to make the
transaction happen.

Chapter 1: Key Issues in International Payments 7

 Who Finances the Transaction?

• Needs funds for payment and

during the period before resale
BUYER/IMPORTER:
of goods, and prefers that the
seller finance the transaction

• Needs funds for production and

the period before payment is
SELLER/EXPORTER:
received, and prefers that the
buyer finance the transaction

Chapter 1: Key Issues in International Payments 8

 In What Currency will Payment be Made?

The currency specified for payment in a contract can have

a significant effect upon the ultimate profitability of the
transaction for either the buyer or seller.
If the value of the specified currency appreciates between
the contract date and payment date, it is a hardship for
the buyer. If it depreciates, it is a benefit to the buyer.

Chapter 1: Key Issues in International Payments 9

 In What Currency will Payment be Made?

In most instances, the specified currency of the

transaction will be a "hard currency," such as the US
dollar (USD) the EURO, the Swiss franc (CHF) or the
Japanese yen (JPY).
In some instances, however, it will be impossible to
conclude a transaction in anything other than a local, less
stable currency. In these instances, it may be possible to
"hedge" the foreign exchange risk.

Chapter 1: Key Issues in International Payments 10

 In What Currency will Payment be Made?

• Wants (typically) to make payment in own

currency or in a currency that is expected to
BUYER/IMPORTER: decrease in value between the date of the
contract and date of the payment.

• Wants (typically) to receive payment in own

currency, a hard currency, or in a currency
SELLER/EXPORTER: that is expected to increase in value
between the date of the contract and date
of the payment.

Chapter 1: Key Issues in International Payments 11

 What are the Political and Legal Risks?

The political environment in both the country of export

and the country of import can have disastrous effects
on international business transactions.
Political instability can lead to
changes in trade policy,
restrictions on foreign transfers,
restrictions on the importation or exportation of certain goods,
changes in monetary policy leading to devaluation of the local
currency, and
riots or civil unrest causing loss or damage to merchandise
potentially not covered by insurance, among other problems.
Political risks are generally outside the direct control of
either trader, they can sometimes be predicted in the
short term and managed to a degree.

Chapter 1: Key Issues in International Payments 12

 What are the Political and Legal Risks?

Legal risks can also affect an international transaction

and can only be managed through extreme diligence.
Lack of comprehensive knowledge of legal issues can
precipitate problems unimaginable in the local
marketplace.
These include unknown procedural restrictions, import
regulations, and more.

Chapter 1: Key Issues in International Payments 13

 What are the Political and Legal Risks?

EXAMPLE: A contract signed in a foreign country was

ruled invalid because the trader was improperly in the
country on a tourist visa.
EXAMPLE: A shipment of encyclopedias published in the
United States languished in customs in Calcutta because
a map of India showed the "de facto" border with
Pakistan, indicating Pakistan's gains from a long-
simmering boarder war, rather than the government
approved map that indicates all the territory as part of
India.

Chapter 1: Key Issues in International Payments 14

 What are the Political and Legal Risks?

• Considers political risk to be

minimal in part because he lives
BUYER/IMPORTER:
with it every day and
understands it.

• May consider political and legal

risks to be significant, especially
SELLER/EXPORTER:
if the country appears to be
unstable by his own standards.

Chapter 1: Key Issues in International Payments 15

 Who Will Bear
Transportation Costs and Risks?

Who pays for transportation and who assumes the

risk if goods are damaged or lost in shipment is
also a major issue in international transactions.
This is especially true in transactions involving high-
value or perishable goods and unusual destinations.
Both the cost and risk increase as goods are
shipped to remote locations or transshipped or
handled over and over again.
The seller probably feels that his quoted price is
excellent and that it is the problem of the buyer to
get the goods to the buyer's home country market.
Chapter 1: Key Issues in International Payments 16
 Who Will Bear
Transportation Costs and Risks?
The buyer doesn't think in terms of the sale price in the
country of origin, he thinks in terms of the landed cost
in his own market.
If the goods are heavy or bulky and are shipped from
Chicago, in the United States, and are going to
Uzbekistan, the transportation and insurance costs will
be high.
Even if the buyer agrees to handle insurance coverage,
the seller may have "insurable interest" in the goods,
especially if they have not yet been paid for.
Timeliness may also be an issue of risk as some goods
are time-sensitive.

Chapter 1: Key Issues in International Payments 17

 Who Will Bear
Transportation Costs and Risks?
EXAMPLE:
Christmas merchandise needs to be on the shelves no
later than early November. This generally means that it
needs to be received by distributors and wholesalers by
no later than mid-October. If the goods arrive on the dock
in early December the selling season has been lost.

Chapter 1: Key Issues in International Payments 18

 Who Will Bear
Transportation Costs and Risks?

• Wants (typically) the seller to bear the

transportation and insurance costs and
BUYER/IMPORTER: to have the goods delivered to a local,
home-country delivery point where
ownership is assumed.

• Wants (typically) the buyer to bear the

transportation and insurance costs and
SELLER/EXPORTER: to deliver the goods and transfer
ownership at his own warehouse or at a
local port.

Chapter 1: Key Issues in International Payments 19

 What Are the Costs of Each Method of
Financing and Payment?

Every moment the goods are not paid for costs the seller
money in financing, while every moment the goods are
not resold in the end market costs the buyer money in
financing.
Who assumes responsibility for the goods at what point in
the transaction will affect the availability and terms of
financing.
Each method of financing and transfer of payment has a
greater or lesser risk for the buyer, the seller and the
banks involved.
Costs are directly related to the risks and someone has to
pay.

Chapter 1: Key Issues in International Payments 20

 Special Cases

Multinational affiliates shipping raw materials or

merchandise to each other will normally do so on open-
account terms, although they might be hesitant to accept
these payment terms from any other international
customer.
High-value or perishable goods normally require special
payment arrangements, such as advance payment or
inspection after arrival of the merchandise and before
payment is made.

Chapter 1: Key Issues in International Payments 21

 Special Cases

Transactions in a developing country, which can be

difficult though profitable, often require cash or
confirmed letter of credit terms. To consider any other
method of payment would probably be a mistake.
In new trading relationships it often makes sense to start
on more conservative terms and, after experience and
greater familiarity, proceed to deal on more liberal terms.

Chapter 1: Key Issues in International Payments 22

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