226 |
Payment in international sales |
|
|
(v)â Transferable letters of credit
In a typical letter of credit transaction, the credit will be payable to the seller (the ‘beneficiary’). However in some transactions there will be a ‘middleman’ involved, and the beneficiary may request that credit be made available to this third party. An example of this is where the seller or exporter has purchased the goods from a third-party supplier and will need to use a portion of this credit to repay the supplier.
(vi)â Back-to-back letters of credit
An alternative to a transferable letter of credit is a back-to-back letter of credit. In this case, the beneficiary asks that the advising bank issue a second letter of credit to the supplier instead of transferring the original credit. However, most banks refrain from this practice as it involves a higher amount of risk, whereas a transferable letter of credit will not be any higher a risk than was undertaken in the original letter of credit.
(f)â Electronic documents
The advancement of technology and modern transport has introduced the need for electronic documents to aid in the efficient running of international transactions. The ICC released the eUCP V1.1 in 2007 to supplement the UCP 600 rules. The eUCP was designed to deal with presentations of electronic documents, either on their own or with corresponding paper documents. An ‘electronic record’ is defined in article e3(b)(i) as:
(a)data created, generated, sent, communicated, received or stored by electronic means;
(b)that is capable of being authenticated as to the apparent identity of a sender and the apparent source of the data contained in it, and as to whether it has remained complete and unaltered; and
(c)is capable of being examined for compliance with the terms and conditions of the eUCP credit.
This mechanism has been very helpful for business people and banks to provide clarity in a sometimes uncertain ‘virtual’ marketplace. The eUCP provides helpful guidelines on terms such as ‘electronic signature’45 and determining what is meant by the term ‘received’.46
6â Factoring
Factoring is one of the oldest methods of financing international trade and offers an alternative option to businesses to finance international transactions.
45 eUCP V1.1, art. e3(b)(ii).â 46â Ibid. art. e3(b)(v).
227 6â Factoring
The process of factoring entails the exporting business or creditor assigning the benefit of the sale contract over to a third party. The third party will usually be a financing organisation and is referred to as the ‘factor’. The factor will assess the value of the contract and advance a portion of that value to the exporter, who in turn will use the money to pay for goods and services. The importer or debtor will pay the sums owed under the contract of sale to the factor. This method of payment serves a useful purpose in international trade as it liquidates working capital and avoids delays in payments for goods supplied or services rendered. It serves to facilitate purchasing of raw materials, making payments to suppliers, expansion of market shares and maintaining a range of goods.
(a)â Types of factoring
There are different types of factoring transactions; for example, factoring can either be disclosed or undisclosed, on a recourse or non-recourse basis. In disclosed factoring, the debtor is informed by the creditor about the existence of the factoring contract. In this case, the debtor transfers the money to the factor’s account, in most cases on a non-recourse basis whereby if the debtor fails to present payment the creditor will not be liable to the factor, thus the risk remains with the factor. If, however, the outstanding debt is on a recourse basis the creditor will be liable for such sums. If the factoring agreement is on a nondisclosed basis then the debtor will pay the outstanding sums directly to the creditor. The creditor will hold such sums as trustee for the factor.
(b)â Two factor system
In a domestic factoring system there are usually only three parties involved: the creditor, the debtor and the factor. However, due to the increasing complications associated with international transactions, such as different languages, currency and financial laws, there are usually two factors involved, one located in the creditor’s country and one in the debtor’s country. The export factor will obtain the relevant information about the sales contract from the exporter and contact the import factor to negotiate the terms of the factoring agreement. There are three main agreements in the two factor system: first, between the exporter and the importer; secondly, between the exporter and his factor; and thirdly, between the import and export factor. The import factor will bear the risk of any default in payment; however, the export factor will bear the risk if on a recourse basis.
This system offers several benefits to the parties involved in international trade. First, factor organisations provide a valuable financial and collection service, to enable the parties to liquidate their assets to finance current and future transactions. Secondly, it provides a credit risk element whereby parties may be protected in the event of default of payment by the other party. Thirdly, it