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![]() ![]() Export and Import Financing
Mechanisms for financing exports and imports have evolved over the centuries in response to a problem that can be particularly acute in international trade. Firms engaged in international trade have to trust someone they may have never seen; using a third party trusted by both countries (normally a reputable bank) to act as an intermediary solves this problem.
Letter of credit A letter of credit, issued by the bank at the request of an importer, states that the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. The great advantage of this system is that both, the importer and the exporter, are likely to trust reputable banks, even if they don’t trust each other. Draft Sometimes referred as bill of exchange, is the instrument normally used in international commerce to effect payment. A draft is simply an order written by an exporter instructing an importer, to pay a specified amount of money at a specified time. Bill of landing This is the third key document for financing international trade. The common carrier transporting the merchandise issues to the exporter. It serves three purposes: it is a receipt, a contract, and a document of title. |
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