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There are four methods in international trade payment against export. Those
are: Cash in Advance or prepayment; Open Account; Documentary
Collection; and Documentary Letter of Credit (LC).
The foreign exchange transaction of Bangladesh for both import and export
are generally made through Letter of Credit. The Import & Export Policy,
Foreign Exchange Regulation Act 1947 and rule of Central Bank encour age
importers, exporters and Commercial Banks to make transaction through LC.
For example, a) import without LC is restricted for up to $35,000 per year
and to some restricted items like books, journals, etc., and b) import against
advanced payment is comparatively complex and subject to prior approval
from Bangladesh Bank (BB) and for limited amount only. The export
proceeds must come to Bangladesh within four (4) months of export
otherwise the exporter and bankers will be held responsible. Considering the
situation, LC is the most popular international trade payment method in
Bangladesh.
Interestingly, the Open Account for import is allowed but there is hardly any
such transaction. Again, importers cannot remit money in advance against
documents up to a nominal amount of a few thousand dollars per annum.
An Open Account transaction means that the goods are shipped and
delivered before payment is due by an agreed date as per contract between
the buyer and the seller, usually in 30 to 90 days. It gives an advantage to
the buyer in cash flow and cost terms, but it is consequently the highest -risk
option for an exporter. The extension of credit by the seller to the buyer is
more common in transactions. The exporters can attract more buyers with
competitive price and favourable paymen t terms. Exporters also offer better
price for order against payment by deferred open account. Because of the
intense competition for export markets, foreign buyers often press exporters
for open account terms. These transactions are also possible after
thoroughly examining the political, economic, and commercial risks, as well
as cultural influences to ensure that payment will be received in full and on
time.
There are many remedies for exporters for transaction against Open
Account. Open Account terms may be offered with the use of one or more of
trade finance techniques: (1) Export W orking Capital Financing, (2)
Government-Guaranteed Export W orking Capital Programs, (3) Export Credit
Insurance, (4) Export Factoring, and (5) Usance LC.
The Export W orking Capital Financing offered to the exporter, who lacks
sufficient liquidity, needs export working capital financing that covers the
entire cash cycle from purchase of raw materials through the ultimate
collection of the sales proceeds. Export working capital facilities can be
provided to support export sales in the form of a loan or revolving line of
credit. The government may guarantee such Export W orking Capital
Programmes. Bangladesh has no such scheme for export finance.
Usance LC is a method of trade financing that al lows the exporter to sell his
medium-term receivables to financial institutions (FIs) at a discount, in
exchange for cash. W ith this method, the FI assumes all the risks, enabling
the exporter to extend Open Account terms and incorporate the discount into
the selling price. Exporters of Bangladesh get this banking product from
banks but subject to mortgage of security against high interest rate.
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