If a company (from the U.S.) desires to export its products (finished lumber) to another country (the Philippines), but the would-be importer cannot get enough credit from domestic sources to pay for the shipment, there are some steps the exporter should take. If taken carefully, they will help the company to successfully export its goods and make a profit.
- To begin with, if the U.S. firm is ready to ship the products under a credit letter, it should provide all the necessary information, namely, delivery terms, time, and prices.
- The importer should apply to an international bank to issue a letter of credit in favor of the exporter for the goods (finished lumber) the Philippines firm wants to buy.
- After the credit letter is issued and forwarded to the exporter’s bank, the exported gets notified about this.
- The U.S. firm ships finished lumber to the Philippines importer on a common carrier and receive a bill of lading.
- The American company presents to its bank a ninety-day time draft drawn on the importer’s bank according to the lading bill and the credit letter.
- After the importer’s bank returns the accepted draft, the Philippines firm agrees to pay it in no more than ninety days. The documents are released, and the importer may receive the shipment.
- If the shipment is made correctly and on time, and the exporter provides all the documents, the firm gets paid by the issuing bank.
Countertrade is a special alternative way to structure an international sale in case regular payment methods are nonexistent, complicated, or impossible. Several developing countries have economic and financial problems, so local firms typically have a certain limit on the countertrade amount (Delaney, 2019). Therefore, if a company does not want to enter a countertrade agreement with a foreign firm, it loses an export opportunity and provides its competitors with a great possibility to enhance its profit and performance (Kenton, 2020). Countertrade is a unique way for exporting companies to easily and successfully enter a competitive market and increase their sales, utilization of resources, and efficiency.
Moreover, a company’s readiness to accept a countertrade deal will foster long-term and strong customer goodwill. After the importer’s financial situation improves, there is a higher possibility that it will continue working with the firm that used to help it over the years (Delaney, 2019). Overall, firms that choose entertaining countertrade gain a significant advantage over the companies that decide to stick to traditional financing forms (Kenton, 2020). As a result, all the benefits of countertrade schemes will generate export revenues and increase firms’ reputations.
Despite the significant advantages of this method of structuring international sales, several risks may scare some companies away and should be considered by all exporting firms entering countertrade. First, a company should be ready to invest in its in-house trading department which is focused on managing and arranging countertrade sales (Kenton, 2020). Next, this method is better for multinational firms, while medium-sized or small ones usually generate fewer profits because of lacking global operations network and utilizing their resources inefficiently (Delaney, 2019). Further, there is an increased risk of negotiation problems related to logistics, prices, agreements, or delivery issues.
What is more, uncertainty about the value proposition may occur if there is major price volatility (Kenton, 2020). Finally, higher transaction costs and the possibility of a failed deal are also those risks that make some firms prefer traditional financing forms.
References
Delaney, L. (2019). What is countertrade and how is it used?. Web.
Kenton, W. (2020). Countertrade. Web.