Both importing and exporting companies face significant risk when trading abroad. In general, a lot of money is involved in international trade and it is therefore important to know what you can do as a company to cover those risks as well and completely as possible. Read more about the risks of international trade and the financial solutions available here. How can you safely trade abroad and sleep peacefully again?
What are the main risks of international trade?
When you, as an exporter, do business with a trading partner unknown to you, there is a risk that you deliver goods or services but are not paid for them or not paid on time by your debtors. How well do you really know your business partner when it comes to security and trust?
As an entrepreneur, you will have to deal with banks other than your own when it comes to both import and export. To pay or be paid. However, not every bank is equally good or reliable and as an entrepreneur it is difficult to estimate whether or not the National Best Bank of Nigeria is a reliable party in your international transaction.
The same actually applies to doing business with countries whose economic, political or cultural situation you do not know enough about. Consider, for example, the situation in Iran, which gives reason for many banks in the Netherlands to no longer want to do business with this country. As an entrepreneur, you do not always know what your business partner’s environment is and how it can influence a transaction.
What can you do to limit the risks of trade or international trade?
With documentary payments, documentary credits or documentary collections, but also with guarantees, you can limit or largely eliminate the majority of the risks mentioned here when doing international business. So that as an importer you can enforce the correct guarantees regarding the quality of the goods and their delivery. And so that as an exporter you can be sure that you will be paid for the provision of goods and services.
What exactly is documentary payment transactions?
Bank guarantees are quite well known among companies that do business internationally. But documentary payment transactions are still relatively new for many companies. In documentary payments, specific conditions are imposed on an international transaction in the form of official documents.
Documentary credit (Letter of Credit or LC)
With documentary credit, also called letter of credit, the bank actually takes over the obligation to pay from the importer. The documentary credit thus protects against all the risks described above for the exporter in international trade. This product is also very suitable for the importer because he determines through a documentary credit under which conditions he is willing to pay for the timely and correct delivery of goods and services.
Documentary collection (Documentary Collection)
With documentary collection, the bank or financial institution only acts as an intermediary and supervises the process in which goods or services on the one hand and the payment for them on the other are exchanged for each other in an international trade transaction.