The Internet has made the world a smaller place and certainly in the area of International
Ordinary people can now buy goods from overseas, source trade leads unavailable in
their own country and trade on the markets with advanced training aids and software.
When you trade wholesale then the extra volume of sales demands a different approach.
Paying for goods in your own country is a straightforward affair. You know the address,
you pay in the same currency and if anything should go wrong you protected by the
laws of your country.
When dealing with overseas suppliers it is not so straightforward. You cannot trade
face to face; you may not even speak the same language, the currency is different
and having no way of actually verifying the seller’s identity or even physical existence
you accept a risk in buying goods unseen.
There are three ways of minimising risk when trading overseas.
The first method only to be undertaken if you absolutely trust the other person is
to send cash and trust that you will receive goods by return. Fortunately in these
modern times organisations such as Paypal offer a form of security if things do go
If you are in the position of being a seller then you are fortunate in being able
to wait for payment to be received before sending any goods overseas.
This is called ‘open credit’ terms and is usually between buyers and sellers who
have known each other for some time. It is not recommended for any new entrant into
The second means of arranging a trade with overseas partners is a Documentary Collection
through your Bank. If you are importing goods the seller will forward all the documents
you need through his Bank, who will pass them to your Bank who will only release
them to you against payment, or any other agreed arrangement.
If you are exporting goods then you can ship the goods but the documents of title
(in other words confirmation of ownership) are submitted through your Bank who will
arrange to collect the funds on your behalf and pay you when received.
Documentary Collection works very well for buyers and sellers who have been dealing
with each other for some time. If selling then you have the opportunity to forward
goods against a bill of exchange. If you have extended a number of days credit to
the buyer before he must make payment then the accepted Bill of Exchange can be discounted
(sold) at your Bank (or any other) and you receive money earlier less the interest
sum charged on the Bill.
The third method and that favoured by most importers and exporters is an Irrevocable
Documentary Letter of Credit. These are discussed in the next section. There are
Revocable Documentary Letters of Credits but as the name suggests these can be cancelled
at any time by either party and are rarely seen.