Global Trade Operations - Assignment Example

GLOBAL TRADE OPERATIONS: By (Insert both names) (Name of class) (Professor’s name) (Institution) (City, State) (Date) Abstract When international firms get into contracts to sell and buy commodities they are at liberty to negotiate particular terms. These terms comprise the quantity, price and characteristics of the commodities as (Dyson 2010) established. Every global trade agreements also include what is known as an International commercial term (Incoterms). In general, there are 13 principal terms and a number of secondary terms which outlines the grounds at which the carrier, shipper and the consignee responsibility and risk start and end. The companies or the parties carrying out the transaction choose the Incoterms which describes who makes payment of every transportation segment, the party who takes the responsibility of loading and offloading the goods and the party that bears the loss risk at any particular time in the course of international shipment. The International commercial terms also affects the valuation of customs of the merchandise imported. According to (Dyson, 2010), the International Chamber of Commerce (ICC) overseas in Paris and supervises Incoterms and are abided to by the major world trading nations. The ICC documented the initial package of this international regulations in 1936 commonly referred to as (“INCOTERMS 1936”) and these terms are amended after every decade. This report discusses the global trade operations of two companies of two different regional trade blocks. These two companies deal in other goods. The report also explores how the seller will make sure that they receive their payments and outlines how either party organizes short-term capital so as to support the cash flow. At the last bit of the discussion, the paper identifies the documentations which will be needed to attain a successful result of this transaction. Background Information The Company of my choice is LG Electronics Inc. and is the exporter. The buyer is (Ibrahim Electronic) in South Africa. LG Electronics. Ibrahim Electronics is the major distributor for Plasma TV in South Africa. The companies want to make place order for 1 container for Plasma Tv from LG Electronics. Introduction According to (Watson and Head 2010) in global commercial processes, the exporters and the buyers would want to transact within the best conditions to themselves. Although the buyer will opt for the longest and the cheapest termed type of payment while paying for the costs of commodities in our case (Sony TW cameras) the seller in most cases prefers cash payments, which is the payment type that is most advantageous and also a type of collection that has the minimal risks. The agreement of Ibrahim Electronic and LG on how and I what terms the payment shall be done is a quite serious moment for both parties. In this section, the payment methods shall be explored in details and their superiorities and risks for export and the Ibrahim Electronics will be evaluated. The Trade Payments methods LG who is the exported organizes the commodities and makes them ready for the dispatch as agreed upon by Ibrahim Electronics, (buyer), has to considers the terms of payment and a financing program is they might experience severe hardships if they are not paid. As a result, it is important for the LG to have adequate information regarding the various payment processes available to them. The major payment methods in global trade process are open account, cash in advance, documentary or draft collection, letter of credit and on consignment. For the purposes of our discussion we will focus on the documentary collection as the mode of payment chosen by LG Electronics. Documentary Collection D/C or documentary collection is a global transaction in which the exporter entrusts payment collection to the exporters’ bank (the remitting bank), which conveys documents to the importers bank (collecting bank), alongside it are payment instructions. Money will be received from the buyer (Ibrahim Electronics) and remitted to LG via the bank(s) participating in the payment collection at the documents exchange. Document collections entail the use of a draft which requires the buyer (Ibrahim Electronics) to pay the same sum either on sight which is (documents against payments). The draft outlines instructions which stipulate the documents needed for the exchange of the title for the commodities as suggested by Watson and Head, A. (2010) Although financial institutions normally act as facilitators for their customers within the collections, the D/Cs provides no verification procedure and limited route in case of nonpayment. A draft is normally less expensive compared to the LCs (Letters of Credits) according to Taylor, A. (2009). Key Notes Documentary Collections are less expensive and less complicated compared to the Letters of Credits. With a Document Transaction, the buyer (Ibrahim Electronics) is not obligated to make payment for the items before the shipment. LG Electronics (the exporter) holds the title to the commodities until the Ibrahim Electronics (importer) makes payment to the face amount at the sight or can accept that the draft bears a legal obligation to make the payment at a later specified date (i.e. 60 days). Financial institutions which play critical role under D/Cs transaction utilization are the exporter’s bank (remitting bank) and the buyers’ bank (collecting bank). Though banks facilitate the movement of documents, they don’t very these documents nor do they incur any risks, but may impact a mutual contentment settlement of a Document Collection transaction. A standardized Documents Collection Flow LG Electronics (the exporter) does shipment of the goods to Ibrahim Electronics (buyer) and in exchange gets the documents. LG Electronics (the exporter) delivers the documents having the payment instructions to its bank. LG Electronics’ remitting bank then transfers the documents to Ibrahim Electronic (buyers’ collection bank. The collection bank thus, should dispatch the documents on draft acceptance from the buyer. The buyer then proceeds to show the documents to the shipper in exchange of the commodities. Once the payment has been received, the collection bank, transfers the takings to the remitting bank. On getting the payment, the exporters’ account is credited by the remitting bank. Within the Documents Collection transactions, LG Electronics has minimal recourse against Ibrahim Electronics in the event of nonpayment. Therefore, the D/C payment systems can be applied under the following situations as established by (Taylor2009). When both parties (LG Electronics and Ibrahim Electronics), have a properly established relationship. LG Electronics (the exporter) is certain that the importing state is stable economically or politically. The open account transaction is viewed too risky, though an LC could also be too expensive to the buyer. After the draft has been paid for, the title documents are dispatched to the buyer to allow them to acquire the possession of the commodities. Since the title to the commodities is not transferred pending acceptance or payment, both the exporter and the seller will be protected. Nonetheless, nothing hinders the buyer to decline a payment draft as indicated by (Gotze, Northcott, & Schuster 2008). Under such incidences, the exporter, who obviously has shipped the commodities, is confronted with the hiccups of getting their goods back, which probably would be involved in insuring or warehousing the goods or perhaps disposing the goods at the point of collection. When the buyer defaults or declines the draft payment, the exporter is entitled to pursue the merchandize collection through courts (or probably through arbitration, when such had been proscribed with the contract between the two transacting parties. Short Term Export Financing Of course it is underestimation to claim that carrying out a business transaction with another person in another country is more sophisticated that simply getting means to transport merchandize over very long distances. One of the very apparent differences from operating locally is because the goods have to clear customs as they cross the global boundaries. This needs documentation of goods value and type. According to (Gotze, Northcott, & Schuster 2008) EWC or Export working capital financing enables sellers (exporter) to buy the merchandize and services which they require to sustain their export sales. To be precise, Export working capital facilities that is provided by the commercial banks may offer a means for the exporters who are lacking adequate internal liquidity in order to process and obtain goods and services to satisfy the orders for export and provide open account agreements to their international buyers. Basically, these funds are normally used to fund three different fields: a) labor, b) materials c) inventory, however, they may also be applied to fund receivables which are obtained from export sales or through standby credit letters applied as payment guarantees or performance bonds to the international buyer. An unanticipated huge export order or a lot of incremental orders for export is a number of occasions bring much challenge to the demand s of operating capital. Export Working Capital assist stabilize and ease the cash flow concerns of the exporters as they bring about export sales and competitively grow in the international markets. 1. Commercial Banks Commercial banks may provide export operations facilities. In order to qualify, the exporting company needs to 1) have been in a profitable business for a minimum of year (exporting is not a must). 2) Manifest the requirement for transaction-based financing; and 3) offer documents to illustrate that a transaction which is viable exists. To ensure the loan repayment, the bank which is lending could attach a lien on the exporter’s assets, for instance, accounts receivable and inventory. Besides, all the proceeds from export sales will be collected by the bank which lends prior to the balance being transferred to the exporter. Interest and fees are normally negotiable by the exporter and the lender according to (Gotze, Northcott, & Schuster 2008). 2. Revolving Lines of Credit or Short Term Loans Basically there are two kinds of export operation capital facilities; revolving lines of credit or short term specific transaction loans. The short term loans, that are suitable for periodic and large export orders, are characteristically applied in scenarios where the inflows and outflows of finances can be predicted accurately in time. Such loans may be contracted for 3 months, 9 months or 12 months and it’s good because the interests are normally provided at a fixed rate for the requested amount. While the revolving line of credit is desirable for a chain of small proportionate orders for export since they are structured to cater for the temporary financial needs which are normally difficult to predict. The revolving line of credit has a more flexible platform which allows the company to draw money from the current account at no specified time but to a certain limit as suggested by Taylor, A. (2009). The Reasons for Risk mitigation: In a much as export working capital funds may definitely render it possible for the provide open account transaction terms in the current fiercely competitive international markets, the use application of such funding, do not necessarily get rid of the risk of defaulting by international buyers. So as to provide open credit offers more boldly, within the international market, the application of some kinds of risk mitigation would be required as Taylor, A. (2009) found out. Moreover, the application of the risk mitigation could be significant for the exporters to acquire export operating finances. For instance, the bank could need the exporter to acquire insurance for export credit as a requirement for financing exports and offering working capital. References: Dyson, J. (2010) Accounting for non-accounting students. 8th ed. Essex: Pearson. Gotze, U., Northcott, D. & Schuster, P. (2008) Investment Appraisal: Methods and Models. Germany: Springer. Gowthorpe, C. (2005) Business Accounting and Finance for non-specialist. 2nd ed. London: Thomson Learning. Holmes, P. (1998) Investment appraisal. London: International Thomson Business Press. Pettinger, R. (2000) Investment appraisal: A managerial approach. London: St. Martins Press.  Rohrich, M. (2007) Fundamentals of Investment Appraisal: An Illustration Based on a Case Study. Germany: Oldenbourg. Taylor, A. (2009) ‘How strategic budgeting can control cost while improving performance’. Journal of Corporate Accounting & Finance. 20(3) pp. 53-58. [Online] http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=f6d67a3e-6ea8-471c-865b-d522816415a7%40sessionmgr10&vid=2&hid=14 [Accessed: 16 January, 2012]. Watson, D. and Head, A. (2010) Corporate Finance: Principles and Practice. 5th ed. Essex: Pearson. Read More