Foreign Exchange - Credit Arrangements

If the American exporter is unwilling or unable to extend credit to the importer abroad, he may require payment in advance or on arrival of goods, in the latter case usually by drawing a sight draft.In this case the importer abroad may solve the credit problem by:

1. Using his own working capital.

2. Requesting his bank to issue a letter of credit to finance the transaction.

3. Requesting an acceptance credit from his bank.

4. Borrowing money from his bank.

If the American exporter is willing to assume the problem of arranging credit, he will consent to draw time drafts on the importer or on a bank, depending on whether or not a letter of credit is being used.Where the exporter has adequate working capital, he may hold the acceptances until maturity, thus carrying the credit load. Otherwise he may transfer the load to the money market by:

1. Discounting or selling the accepted drafts or borrowing against them.

2. Using the accepted drafts as security under an acceptance credit.

3. Arranging a bank loan, possibly using the accepted drafts as security.

No comments: