CHAPTER XXIV

FINANCING FOREIGN SHIPMENTS

The various methods of financing foreign trade may be classified as follows: (1) cash with order; (2) open credit or open book account; (3) drafts drawn by the seller on the buyer to be either paid upon presentation or accepted by the buyer, the latter method giving rise to trade acceptances; (4) commercial letters of credit. The subdivisions of the last-named form of credit are cash or straight credit and banker's acceptance credit.

Cash Terms. There is nothing peculiar or condemnable in the demand that cash be provided by totally unknown buyers before merchandise is forwarded to them. Unless such buyers can furnish evidence of their ability and willingness to meet their obligations when these fall due, they can not expect credit from sellers. When these buyers live in foreign lands there are additional reasons for exercising caution in the extension of credits; collections of overdue accounts are much more difficult when debtors are separated from creditors by thousands of miles and when there is the necessity for contending with diversity in commercial laws and customs. The error lies not in demanding cash, but in demanding it, as our manufacturers have often done, from foreign importers who possess a high commercial rating and whose credit worth and business integrity can be readily ascertained. A refusal to grant such firms credit results in a regrettable loss of business. Some foreign importers refuse to make cash payments because they consider that a demand for such payments casts reflection on their commercial honor. A more important cause for refus

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ing such payments is that they immobilize the importers' funds for too long a period of time. Many foreign importers object to paying cash because of the very unpleasant experiences which they have had with some manufacturers who refused to ship goods except on a cash basis. After the receipt of the purchase price these manufacturers were guilty of delayed deliveries, of careless packing, and in some instances of substituting inferior goods. Manufacturers demanding cash should recognize that, as a rule, foreign buyers know as little about them and about their trustworthiness as they do about foreign buyers.

Cash remittances are also objectionable to foreign buyers because in the case of a manufacturer's failure before he ships the goods, the remitted funds become absorbed in the bankrupt estate. The foreign importer must then take his chances with the other creditors of the concern. While in normal times such contingencies seldom arise, their possibility exists and acts as a deterrent to cash payments.

Partial Payments in Advance.-A partial payment in advance is not a satisfactory arrangement for the exporter unless the payment received is sufficiently large to cover all the expenses which it may become necessary to incur should the acceptance of the goods be refused by the consignee. A small payment in advance is not a guarantee of "good faith," and it does not safeguard the interests of the exporter to such a degree as to be considered a desirable merchandising device in foreign trade. Cases are known where schemers have resorted to such payments for the purpose of securing shipments of goods, only to reject them upon arrival. Refusal to accept usually places exporters in a difficult position, and they have often no alternative but to offer the goods for sale at lower prices.

Open Credits.-Open credits or open accounts are the least desirable form of mercantile credit. The disadvantages of this kind of credit are more pronounced in foreign than in domestic trade. Such credits in export business were first confined to dealings between neighboring coun

tries, where the ascertainment of the financial status of the credit seeker and the supervision of accounts was a comparatively easy matter and where, in case of delinquency, action could be promptly taken.

Open credits were adopted in overseas business for two reasons: (1) because exporters found that where importers had become accustomed to such credits, they refused to do business on any other terms, or (2) because loose methods in extending credit were conceived as a competitive device to win trade. It is needless to say that in adopting such methods for the latter reason, one is dealing with a most reprehensible form of competition—a form which can not be too strongly condemned. It may bring some temporary favorable results, but business thus gained carries within it the germs of its own destruction; it rests not on the solid foundation of real service, but on the casting aside of sound business principles, on the degradation of credit.

Previous to the War, few American manufacturers were guilty of shipping goods on open accounts; if they erred, it was in the opposite direction; they refused to grant any kind of credit, demanding cash against documents. Open account business was carried on, if at all, by export commission houses. These houses can sell on such terms more easily than manufacturers because of their more intimate knowledge of foreign markets. Commission houses act as agents for foreign importers, with whom they maintain close relations; they usually charge interest on money which they advance for them to manufacturers and they reimburse themselves at maturity by means of drafts.

The granting of open credits should not be considered by manufacturers unless they have local representatives abroad who can attend to the adjustments of complaints and to the securing of payments.

Similar to an open credit operation, but somewhat more satisfactory from the shipper's standpoint, is the dispatch of shipping documents directly to the importer and a simul

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taneous drawing of a clean (non-documentary) draft against him. Like an open account, such procedure implies complete confidence in the foreign importer. Its advantage lies in the fact that, with the acceptance of the draft, a binding evidence of indebtedness is created. An accepted draft also fixes a definite time for payment and it eliminates the tying up of funds in book accounts; an accepted draft being a negotiable instrument, the shipper may obtain funds on it before the maturity of the document.

Bills of Exchange or Drafts.-International commerce is financed largely through the medium of bills of exchange or drafts. It was in this commerce that men first learned to dispense with the direct use of money in settling accounts. During the Mediterranean era of commerce, the difficulty and danger of transporting large quantities of precious metals over great distances led to the invention by Lombardian Jews of the bill of exchange; the use of this document spread rapidly to different countries.

Drafts may be either "clean," that is, unaccompanied by documents, or documentary. Most of the drafts used in foreign trade are documentary. If the goods are sold for cash at destination, the draft is drawn at sight with the documents representing the shipment attached to it; these documents are delivered to the foreign buyer upon payment by him of the amount due. If credit is extended, the draft, in accordance with the terms of sale, is drawn at thirty, sixty, or ninety days sight or thirty, sixty, or ninety days from date of the invoice, the attached documents being delivered to the importer upon his acceptance of the draft.

Exporters usually offer their drafts for discount to their local bankers. The negotiability of a documentary draft, reading "documents against payment," is influenced primarily by the nature of the goods shipped. Staples are considered a much more desirable collateral than novelties, articles of fashion, or perishables, as they possess a higher degree of salability and less likelihood of depreciation in

value. The financial responsibility of the drawer of the bill is the next important consideration. His responsibility, as well as that of the drawee, are of primary importance when the draft reads "documents against acceptance," as in this case the banker, after the surrender of the documents, loses the security offered by the control of the merchandise. Irrespective of the nature of the draft, the drawer remains liable until the draft has been paid by the drawee.

A documentary draft has the following fundamental documents attached to it: a full set (three) of negotiable bills of lading made out to order and endorsed in blank, a certificate of marine insurance in duplicate, two copies each of the invoice and of the memorandum of weights and measurements. All these documents are surrendered to the bank, which thus acquires the title to the goods.

The draft and the documents are forwarded to a correspondent bank in the importer's territory. If the draft reads "documents against acceptance," the bill of lading and other papers must be delivered to the foreign importer upon his acceptance of the draft. In such cases a trust receipt is often required by the foreign banker from the importer. The purpose of the receipt is to make the importer accountable for all goods delivered to him.

The amount which the exporter receives from the bank is the face value of the draft minus collection charges and interest for the time the draft is to run until maturity. When the banker is dissatisfied with the nature of the goods against which the draft is drawn, or when he doubts the financial responsibility of the drawer or drawee, he may, instead of buying the draft, offer to advance on it a certain amount of money, varying in accordance with the conditions of the case.

Banks often take exporters' drafts for collection, agreeing to act as their agents abroad. They send such drafts to their branches in the importer's territory, if such exist, or to correspondent banks.