The global solution for low-risk business

Once a company begins doing business abroad, its financial risks rise enormously. A company that wants to sell its products on the other side of the world must ask many questions, including how it can reliably receive its money or whether the goods will indeed be accepted after shipment. This is because the business partners frequently may not know each other personally, and their relationship may be restricted to telephone contacts. In such cases, a company can use a number of financial options to lower the risk. Institutions such as banks offer helpful products, including the documentary letter of credit.

Method of paying documentary letters of credit

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New financial services in global logistics

Supplier terms

In supplier terms, contracts can draw particularly on Incoterms Incoterms . These terms contain customary, standardized contract language for international trade and regulate the transfer of risk - e.g., at which point a supplier or a customer is liable for damages.

Payment conditions

The payment conditions regulate the interplay between the flow of goods or information in the logistics system and the stream of payments. These conditions set the time and terms of payment for delivered products and/or services. The payment is transacted with documents like waybills Waybill , insurance papers or commercial invoices Commercial invoice through which the right of disposal for the goods is transferred from the seller to the buyer. One of the most important payment methods is the letter of credit Letter of credit . In this process, the importer (letter of credit applicant) asks his bank (issuing bank) to provide a letter of credit on behalf of the exporter (beneficiary) at the exporter’s bank (the advising bank).
Generally speaking, the letter of credit Letter of credit is a payment promise under which a certain sum of money will be paid to the beneficiary upon the fulfillment of certain conditions. With a documentary letter of credit, the bank carries out its payment pledge once documents about the exported goods are presented. In a revocable letter of credit, the issuing bank can alter or revoke the letter of credit upon the request of the importer without the exporter’s being informed of the decision. In an irrevocable letter of credit, the issuing bank is required to make the payment without fail as long as the prescribed documents are presented.
On the basis of supplier and payment conditions, banks have developed new services under the umbrella term “financial engineering.” These products enable the capital tie-up of current assets at industrial and retail companies to be reduced. Such financial services are particularly important as a result of the increased risk and the longer application-processing times associated with international logistics [1].

Currency risks in international business

The currencies of various countries can affect international logistics in two ways. Important factors are foreign-exchange controls and exchange-rate risks associated with warehousing Warehousing and order processing Order processing .
To manage the exchange-rate risk, currency hedging tools can be used. The exchange-rate risk related to inventory valuation can also be reduced by taking the location of production sites and warehouses into consideration.
In selecting their locations, companies can give priority to countries with stable currencies or consider investments in locations as an investment in a currency portfolio. Shortening the order-processing times also helps lower the exchange-rate risk.
In addition to exchange-rate risks, foreign-exchange controls have an impact on international logistics. For instance, if a company working in developing countries has access to limited amounts of foreign currency for product imports, it will have a limited ability to create inventories in these countries [1].

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