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Mne's and Payments

Essay by   •  September 12, 2012  •  Research Paper  •  775 Words (4 Pages)  •  1,882 Views

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As everyday consumers we use various forms of payments to purchase goods and services either made locally or internationally, so one wonders how MNE's choose what types of payments they use for international trade.

(Shenkar, O. & Luo, Y., 2007, pp.379-384) The choices that MNE's use to handle trade payments are Cash in advance, Letter of Credit(L/C), Documentary collection, Open account.

Cash in advance is the most secure form of international trade payment because payments are paid in advance before the product is shipped or received. MNE's use this type of payment when they do business in countries that have instabilities within the government or economy. (Hardin, 1994) Products that usually have strong demand or are one of a kind can usually benefit from these terms. The disadvantages associated with cash in advance (Trade Finance Guide, 2008) Companies may lose customers due to payment terms and there is no more earnings accumulated after payments have been received.

Letters of Credit (L/C) (Shenkar, O. & Luo, Y., pp. 379-384) The most common form of payment for many MNE's is letter of credit. The bank acts on behalf of the buyer which draws up a letter of credit which is signed and written to the seller. There are conditions that are set when the letter is drawn up that both seller and bank have to adhere to. (Trade Finance Guide, 2008) The advantages that accompany letters of credit is that payments are made after shipping and there can be a multiple payments, financing risks options available. The disadvantages can be complex for the seller and buyer, it can be more costly to use letters of credit when dealing with the transactions costs. Letters of credit can be confirmed which one bank issues a L/C and another bank confirms it. Illustrative involves the importer arranging the L/C to the issuing bank for the exporter, the goods are then shipped and the documents are sent to the bank that the importer chooses, the bank then checks the documents against the L/C and collects payment and finally the bank releases the goods and documents to importer.

Documentary Collection (Shenkar, O. & Luo, Y., pp. 379-384) is a type of payment where the goods are still owned by the exporter until they receive payment. (Trade Finance Guide, 2008) The terms are cheaper and more suitable for the importer. The disadvantages of documentary collection are that the banks are limited and don't guarantee payments and the documents are not verified either.

Open Account (Shenkar, O. & Luo, Y., pp. 379-384) involves the goods being shipped first to the importer and payments being received later usually within 30 to 90 days. (Trade Finance Guide, 2008) Open accounts involve low risk trading and are a preferred method of payment when there is competition in the global market. The risks are more prominent for the exporter because the seller can default

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