EXPORT FINANCE

&
DOCUMENTATION
 EXPORT PRICING
 Introduction
Export marketing in particular requires
extremely careful pricing as generally
the orders are bigger and repeat buys
will not happen if the exporter
overcharges the foreign buyer even
once.

Similarly under pricing will cost the

exporter .
 Pricing for export is different than
domestic pricing. Additional
considerations needs to be given to
cost of modifying product or support
material for foreign market, the
logistics for getting the product to
foreign market, insuring the product,
financing costs, transportation and
other costs unique to exports such as
– long distance communication costs
and exchange rates etc.
 Pricing products in foreign markets can be
a big challenge as prices suited in one
market may be disastrous in another.

 As such an exporter must thoroughly

evaluate all variables that have a bearing
on the price of the product offered in the
foreign target market.

 It is also important that the exporter

obtains as much information as possible
on foreign market prices as part of his
export market research.
Factors Affecting Price of any
Product

PRICE

COMPETITION COSTS

CUSTOMER
EXPECTATION
 1. Costs
 Costs serve the basic purpose of arriving at the
minimum price also known as the floor price. These are
basically bounded to production and other related costs.
Costs serve as the foundation of any
pricing as the objective of every business
is to make profit, even for non-profit
organization, it is not to incur any losses.
Profits will commence as and when one is
able to recover all the incurred costs.

 2. Competition
 Competition plays a very vital part in any pricing
decision as it defines the price ceiling or the maximum
price. Based on ones costs and competitor’s price the
exporter has to work out its own prices.
 3. Customer Expectation

 Here one must take into account the

customer demand at various price levels.
Pricing is done for customer acceptance
and it should be an optimum price to suit
customer expectations.

 In addition to above factors the

Government Tax Policies,
Transportation costs, Distribution
costs, and miscellaneous other costs
also need due consideration.
 Pricing Strategies
 1. Penetration Pricing Strategy
 Penetration or low price strategy refers to
volume policy. Products are priced low to
gain speedy acceptance in the market.

 2. Skimming Pricing Strategy

 Under the skimming pricing strategy
products are priced high where the product
is an innovation, unique in market, set-up
costs are high and demand is relatively
inelastic.

 3. Holding Pricing Strategy

 Market holding is a strategy intended to
hold market share. Products are priced
based on what market can take.
 Methods of Export Pricing
 1. Cost Plus Pricing

 This method is based on adding the desired markup on

costs – including domestic costs and exporting costs
(documentation expenses, freight charges, custom duties,
and international sales and promotional costs) to arrive
at the price for export markets.

 However domestic marketing and promotional costs are

not taken into account.

 This method permits the exporter to maintain his desired

profit percentage to set a suitable export price. However,
this price may or may not suit the foreign markets
 Example

 Cost of producing a pair of shoe 120.00 (FC + VC)

 Domestic marketing cost included

in price 15.00
 Export related costs 20.00
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As such Cost of export will be 120-15+20=125.00
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 Mark up 20%
 Export price 125.00 + 25 = 150.00
 While fixing markups following options are available :
 High Price Option
 This approach will use higher markups to produce
big profits. It may work if a company is selling a new
and unique product targeted at the upper end of the
market.

 Moderate Price Option

 This is a middle path focusing on a lower risk as
compared to high or low price option. The emphasis
is on matching competition, building a market
position, and earning a reasonable profit margin.

 Low Price Option

 This route is generally taken to impede the
competition to penetrate a market, suitable in case
one is trying to reduce inventory and does not have
a long term commitment. Such pricing will result in
low profit margins.
 2. Marginal Cost Pricing

 An improved version of cost plus method is called

marginal cost pricing. The fixed cost including
expenses incurred on modifications to the product
for producing an additional unit for export is
determined first. Variable costs are then added to
arrive at realistic total costs for exports.

 Such costs invariable include Packaging, Foreign

Market Research, Advertising & Marketing,
Exchange Conversion/Fluctuation Costs, Foreign
Agent/Distributor Product Information & Training,
After sales service costs etc.

 Margins are then applied to arrive at the export

cost. This method is more realistic determination
of cost of producing products for exports.
 3. Competitive Pricing

 Costs are important in pricing decisions.

However, they should be looked at
alongside the prices of competitive
products in the target markets. Prices
need to be set in tune with the
competition. Most customers compare
prices of alternatives before coming to a
final decision. If one's prices are set in
isolation, these may not find favor with
the customer, except in cases where
there is no competition.
 4. Market Pricing / Target Pricing

 Extensive competition and availability of

variety of products have necessitated
market pricing also known as target
pricing. Here, the exporter has to work
on a price that the customer is wiling to
pay and focus shifts on managing costs
as efficiently as possible.

 This has happened because the customer

today is highly informed – he knows most
costing and is ready to pay only what
suits him.

 The exporter needs to work backward

from the target price down to the costs
and find margins for him by managing his
overheads and other costs better.
 Example

 Target price in foreign market 25.00

 (-) 30% retail margin on SP 7.50

-------------
Retailer Price
17.50
 (-) 7.5% Distribution Markup 1.31
-------------
Distributor Price 16.19
 (-) 12% Import Duties/Levies 1.94
-------------
CIF Price 14.25
 (-) Freight & Insurance 1.60
-------------
Target FOB Price 12.65
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 If the exporter cannot match 12.65
with his margins, he must consider
either of the following :

 Refuse to export.

 Find an alternative supply source to

bring the costs down.

 Find ways to reduce costs by modifying

the product or shortening the channel
of distribution.
 Export Payment Terms
 Refer to INCO Terms
 Methods of Payments for
Export Transactions
 While negotiating an export order it
is essential that the payment terms
are also discussed and finalized.
These include methods or mode of
payment, that is, how and when the
payment will be made by the buyer
and received by the exporter.

 Generally following methods are

available for exports :
 Advance payment
 Open Account
 Consignment Sale
 Documents against Acceptance (D/A)
 Documents against Payment (D/P)
 Letter of Credit
 1. Advance Payment
 It is the safest payment option where the importer
sends the payment in advance to the exporter
either through cheque or demand draft. This is
normally done after acceptance of the order by the
exporter. The exporter is safe as he will ship the
goods only at a later date. He also gets a ready
solution to his liquidity problem as he can use the
funds towards production of export order.

 This method, however, is not safe for the buyer

and therefore is not generally preferred.

 This method is least expensive as no interest /

commission is required to be paid anywhere and it
is also the least complicated as it does not involve
any procedural formalities.
 2. Open Account

 This is an arrangement between the buyer and

exporter where goods are shipped without the
guarantee of payments. Both the parties agree on the
sales terms but no documentary evidence is created.
The odds are heavily loaded in favor of importer as
the payment will be released at a later date.

 The accounts between the exporter and buyer are

settled periodically. Chances of default or delay in
payments are very high under this system. The
exporter must deal with only trustworthy buyers
under this scheme.

 This system suits the importer as he obtains delivery

of goods without having to pay for them. He need not
arrange any finances, thus saving on expenses, time
and effort. For him it is totally convenient and trouble
free.

 In most of the cases Open Account system is used by

firms having dealings with each other for long
periods of time or between firms and their
associates.
Open Account Transaction Flow

Shipment
Exporter Contract Importer
Payment

After Receipt
Payment

of Goods
ent
payment

m
pay

Exporter payment Importer

Bank Bank
 3. Consignment Sale

 Under this method goods are shipped by the

exporter but he transfers the ownership to the
importer only when the goods are actually sold. This
means the entire risk here is borne by the exporter.
If importer is unable to find an actual buyer, the
exporter is stuck with the unsold stock and he
cannot claim the payment for the same from the
importer.

 The exporter’s funds are blocked throughout this

period and he is responsible for additional expenses
such as interest, warehousing costs, commissions,
insurance charges etc. this arrangement is full of
uncertainties as the exporter is not sure of the
actual sale, timeframe and the price realization.
 Consignment exports offer a chance of
earning higher prices in markets abroad.
Ideally this system is suited to exporters
who have their own affiliates abroad and
sizeable control over sales.

 The exporters using this method must also

be financially sound to manage longer
periods of uncertainty and bear additional
expenses.

 An interesting example of this method in

India is found in the area of agro exports.
Normally in trade of agro exports (except
onion, rice, and other cereals, mango
pulp), the importer never provides LC.
Such export is done on a consignment
basis, and the payment as per actual sales
is made.
 4. Documents Against Acceptance (D/A)

 This system is based on documents and

thus falls under the category of
Documentary Credit.
 The exporter does not want to part with
ownership of goods unless he is certain
about the receipt of payment of the same.
 The importer on the other hand does not
want to pay unless he is sure about the
receipt of goods.
 Banks function as intermediates, providing
assurance to both the parties on the other’s
behalf and use documents as a tool for this
assurance.
 Under the D/A method the exporter sends the
shipment documents along with the draft (bill of
exchange) through his bank to the importer’s bank
that gets the draft accepted by the importer before
handing him the title documents.

 The importer thus gets the title to the shipment

against his acceptance of bill of exchange for the
value of shipment. These drafts are normally readied
for presentation after 30/45/60/90 days from the date
of acceptance.

 The exporter presents the same on the due date to the

buyer’s bank through his bank and gets the payment.

 The system provides for delivery of ownership

documents against acceptance of an instrument of
debt.
 The arrangement seems fine as a
concept. However, there is a great risk
for the exporter, as the bill may not be
honored by the buyer on presentation.
The buyer certainly is safe as he gets
the delivery of shipment much before
the due date for payment.

 The exporter will have to face a lot of

difficulty and losses, in case the buyer
does not honor his commitment.
Documents against Acceptance (D/A)
Flow

Sales Contract

1. Goods Importer / Drawee

Exporter / Drawer
4a. Accepts Drafts

4c. Documents
Acceptance
2. Documents

5b. Payment
7. Payment

4b. Trade
Instructions

Acceptance
(Credit)

(Debit)
Drafts,

5a. Trade
3. Documents, Draft, Collection
Order
Collecting /
Remitting Bank 6. Payment Presenting Bank
 5. Documents against payment (D/P)

 Like in D/A arrangement, here too the

documents are sent to buyer’s bank with a
draft (bill of exchange). However, this draft is
a sight draft and not a usance draft.

 This draft has to be paid immediately on sight

and only after the receipt of payment the
shipment title documents are released. It
means that the importer gets possession of
ownership documents of the shipments only
after making payment for the same.

 The exporter on the other hand, releases

possession of shipment title papers only
against the receipt of payment. No credit is
involved here.
Documents against Payment (D/P)
Flow

Sales Contract

1. Goods Importer / Drawee

Exporter / Drawer

4b. Documents
4a. Payment
2. Documents

6. Payment
Instructions

(Credit)
Drafts,

3. Documents, Draft, Collection

Order
Collecting /
Remitting Bank 5. Payment Presenting Bank
 6. Letter of Credit
 A letter of credit is a very popular form of
documentary credit. In fact majority of
international business transactions use LCs.
 The letter of credit is a letter established by
importer through his bank to the benefit of
exporter promising payments of drafts drawn
against this letter if the exporter complies with
the specific conditions prescribed in the LC. The
conditions are usually the same as stipulated in
the purchase order or export contract.
 As such LC acts as a substitution of importer’s
promise to that of his bank's to the exporter to
honor its commitment to pay for the export bills
provided all conditions are satisfied. In this way
LC works as an independent contract between
exporter (designated beneficiary) and the
issuing bank.
 More formally letter of credit can be defined
as “A binding document that a buyer can
request from his bank in order to guarantee
that the payment for goods will be
transferred to the seller. Basically, a letter of
credit provides reassurance to the seller that
he will receive the payment for the goods. In
order for payment to occur, the seller has to
present the bank with necessary shipping
documents confirming the delivery of goods
within a given time frame. It is often used in
international trade to eliminate the risks such
as unfamiliarity with the foreign country,
customs, or political instability”.
Letter of Credit (LC) Flow

1. Purchase Order

US Importer in 5. Goods Shipment Indian Exporter in

New York New Delhi
Documents Forwarded

6. LC, Draft, Shipping

4. LC Notification
2. LC Application

on Maturity
11. LC Paid

9. Payment
Documents
10. Shipping

3. LC Delivered

Citi Bank, 7. LC, Drafts, Shipping PNB, New Delhi,

New York India
Documents Delivered
8. Draft Accepted & Payment
(Funds) Remitted
Types of Letter of Credit
 1. Documentary and Clean LC

 A Documentary LC is one that requires the

exporter to submit certain documents like
commercial invoice, packing list, customs
invoice, inspection certificate, certificate of
origin etc, together with draft to issuing
bank. Most of the LC used in export/import
fall under this category.

 A Clean LC on the other hand, is one that

does not require presentation of any
documents. Clean LC are normally used for
bank guarantee.
 2. Revocable & Irrevocable LCs
 The term revocable and irrevocable refers to instructions
received by the advising bank (exporter’s bank) from the
opening bank (importer’s bank).
 A LC is revocable when it is used only as a means of
arranging payment and carries no guarantee. It can be
withdrawn without any notice at any time up to the
presentation of drafts under LC for payment to the
issuing bank. As such there is no protection for the
exporter. For instance he could ship the goods, take the
documents to the advising bank and find that the bank
will not accept the documents and pay him because the
letter of credit has been revoked.
 However the opening bank is responsible for any
operation on the revocable credit effected prior to the
receipt by the negotiating bank of any cancellation or
modification advice.

 An Irrevocable LC, to the contrary, carries both a

payment arrangement and a guarantee of payment and
therefore can not be revoked. Most international
transactions use irrevocable LCs
 3. Confirmed & Unconfirmed LCs

 If an irrevocable LC is opened by a bank in buyer’s country, the

seller may require the credit to be confirmed by a bank in his own
country as he may be unaware of the standing of opening bank, or
may otherwise like to ask for additional protection of his interest.

 In such cases, the opening bank requests its correspondent (say

SBI in the LC flow chart) in the seller’s country to add its
confirmation which in effect means that the confirming bank
undertakes the liability to honor the seller’s drafts under the credit.

 It bears an unequivocal undertaking that drafts confirming to the

terms of credit will be honored notwithstanding any change in the
position between the person or the bank opening the credit and
the confirming the same.

 It ensures double protection to the seller since it already

irrevocable on the part of the opening bank and additionally on the
part of confirming bank in his own country.
 For better understanding let us go back to flow
chart of LC.

 If the LC issued by Citi bank if confirmed by SBI’s

local branch in New Delhi, and if Citi bank does
not honor the LC, our Delhi exporter can always
go to SBI’s confirming branch and claim
payment.

 Under Unconfirmed LC this obligation i.e. the

obligation to make payment lies only on the
issuing bank.

 Most exporters usually insist on a ‘Confirmed’

‘Irrevocable’ letter of credit. Under all
circumstances they will receive payments for
their goods, as long as they keep to the
conditions specified in letter of credit.
 Special Letter of Credit
 1. Revolving LC

 Such credit stipulates automatic restoration of

the amount already drawn (under the credit)
as soon as bills are paid, thus obviating the
necessity of opening a fresh credit for each
dispatch / shipment. Revolving credit can be of
two types :
 Cumulative – cumulative revolving LCs will automatically
apply / add the unutilized amount during a given time and
the same will be carried over to the next period.
 Non-cumulative – non cumulative LCs will consider the
unutilized amount in a given time as lapsed and will not
add this to be carried over to the next period.
 2. Transferable/Assignable/Transmissible LC

 Transferable LCs are those under which the beneficiary

is given the right to transfer the benefits available
under LC to one or more secondary beneficiaries. No
LC can be transferred unless it specifically authorizes
the beneficiary to do so. The LC itself has to contain a
transferability clause.

 Transferable LC has functional advantage. The

exporter can use the LC transfer to enable his supplier
to raise working capital on strength of the LC. This
saves him the entire process of arranging finance to
pay his suppliers to buy goods for them. As such this
LC is very practical and convenient. The supplier can
make use of the credit worthiness of original buyer.
 3. Back-to-Back or Countervailing LC

 This credit is usually opened to finance an

intermediary who is short of capital but is not
willing to disclose his overseas buyer the name
of actual supplier. A banker issues such a credit
in favor of actual supplier on the strength of a
credit established by overseas buyer in favor of
intermediary.

 A back to back credit naturally stipulates an

earlier validity date and a smaller amount to
enable beneficiary (intermediary) to replace the
actual suppliers invoice by his own and earn a
margin of profit.

 While granting such facilities, a banker requires

to ensure itself that the documents to be
submitted by the actual supplier and the
substituted ones confirm precisely to the term
of credit established by the overseas buyer.
Benefits of LC (Advantages)
 To Exporters

 LC minimizes the credit risk, provided the issuing bank is

reputed and carries a sound track record.
 LC eliminates the risk of payment delays due to uncertain
factors like political instability.
 LC affords financing for exporter. All nationalized banks in India
are more than willing to finance an exporter who has an export
order backed by LC from a reputed bank.
 LC normally have a stabilizing effect on production by the
exporter as the exporter is bound to ship by a certain date as
per the LC, failing which the order will stand cancelled.
 LC minimizes uncertainty and provides a clear picture to the
exporter regarding all requirements for payment.
 To Importers

 The importer placing orders to exporters backed by LC

commands a great respect and bargaining power. He is in
a position to ask for better prices and faster deliveries.
 Use of LCs will attract a large number of good suppliers,
offering the importer a lot of choice.
 The importer is assured of timely shipment of the
specified quality and quantity of ordered merchandised.
Documents under LC like Bill of Lading and Inspection
Certificate by the buyer nominated agency serves the
purpose well.
 The importer can refuse payment if finds any and even a
very minor mistake/oversight (referred as documentary
discrepancy) in any of the required documents. This
affords him a very tight control over the exporter,
ensuring accuracy of shipment and related paperwork.
 Importer’s risk of losing money, in case the supplier is
unable or unwilling to effect a proper shipment, is totally
eliminated.