TM - Chapter 12 TEXTBOOK

Break-Even Minimum Transfer =

(Wire Cost - ACH Cost) / (Days Accelerated x (Opportunity cost/365) ) - opportunity cost is either the short-term investment rate or a short-term borrowing rate.

Barter and countertrade

- Barter involves the direct exchange of goods or services between two parties without the exchange of money. ---> frequently used when funds cannot be repatriated due to currency controls or other legal limitations. - Countertrade is similar to barter but is used by firms that do not use currencies that are internationally traded to pay for imports from other countries. ---> for example, an exporter ships merchandise to the counter trading country. In exchange, it takes merchandise that may be sold elsewhere in the world. Pricing and foreign exchange rates are established between the trading parties. This differs from barter in that the exporter is receiving valuable goods for resale locally to recoup its costs rather than a product that it intends to keep and use for its own purposes.

payments fraud control practices:

- Positive pay, ACH filters and blocks, and daily reconciliations are among the methods most used to help detect and control payments fraud. - Use of check stock with built-in security features, such as microprinting, holograms, and other non-photo reproducible features. - Appropriate segregation of duties so that the person reconciling accounts is not the person who can initiate transactions from the account. - The use of dual authentication for all EFT transactions, where one person originates a transaction and a second person reviews and releases the transaction. - The reduction or elimination of non-repetitive wires. - The use of separate accounts for deposits and disbursements. - Specific-purpose deposit-only ZBA accounts with debit blocks or filters. - Check blocks for ACH-only ZBA accounts. - The use of a dedicated computer (i.e., not used for other purposes) for the initiation of online EFT transactions.

typical information disclosed in the documentary collection letter is:

- name of the exporter - name and address of the importer - info regarding the collecting bank - details of the documentation accompanying the collection - date, tenor (i.e., length) and value of the collection - details of bank and other charges to be paid by the exporter, importer, or both. - recourse procedures in the event of nonacceptance or nonpayment. - any nonstandard terms or conditions.

global concentration of funds

- physical pooling - notional pooling - bank overlay structure

lockbox advantages over an internal company payment-processing center:

- reduced mail and processing float - improved access to remittance information - reduced information float - reduced risk and improved security since payments are no longer received internally. - improved control and record-keeping capabilities - uninterrupted service - scalability - proper segregation of duties

Discount =

1 - (1 / (1 + TD(r/365)) )

Controlled disbursement

A bank service that provides same-day notification to a company of the amount of checks that will clear against its disbursement account on a given day. - The amount of time it will take a check to be presented at a payor's bank can vary significantly due to such issues as mail and processing float. - allows companies to efficiently pay vendors and not leave existing balances in account. - companies have to manually ensure any shortfall is covered when coming into account. - With this, the account is typically not funded each day until after the daily notification is received. The daily clearings are normally available by early or mid-morning, allowing the treasury professional to more accurately determine the cash position. - Typically funded from a concentration account, in which case an automatic internal bank transfer is made. ---> This is usually accomplished by setting up controlled disbursement accounts as ZBAs. - For risk control purposes, most banks require that controlled disbursement accounts be funded either from another account at the same bank or by wire transfer. - One of the principal advantages of this account is that it allows the treasury department to calculate the daily cash position early enough to take advantage of better market rates for investing or borrowing.

Positive pay

A disbursement service used to combat payments fraud related to both checks and ACH. - With this service, the company transmits a file of payment information to the disbursement bank either at or before the time of the physical distribution of checks or anticipated ACH debits. - the bank matches check serial numbers and dollar amounts of checks presented for payment against the issue database and pays only those checks or ACH transactions that match all relevant criteria. - many positive pay services also offer the ability to match against the payee field, as well as the serial number and the amount, in an effort to detect an altered payee. - in the case of ACH positive pay, transactions are matched based on dollar amount and originator.

Letter of credit (L/C)

A document issued by a bank, guaranteeing the payment of a customer's draft up to a stated amount for a specified period, provided certain conditions are met. - substitutes a bank's credit for that of the buyer, virtually eliminating the credit risk to the seller. - widely used method of payment for import and export shipments and are used frequently as a financing vehicle for cross-border trade transactions. - two types: commercial and standby

Notional pooling

Accomplished by making balancing entries on a set of virtual accounts with no changes to the bank accounts held by company entities. - As there is no physical movement of money, inter company loans are not required to account for the notional transactions. - Banks usually require credit facilities to support any deficit balances in the pool, and notional pooling often requires extensive cross-guarantees among subsidiaries, which many firms find very difficult to implement. - some countries, including the US, Germany, Mexico, Japan, and Brazil, disallow notional pooling.

integrated or comprehensive accounts payable (A/P)

Allows a firm to outsource all of part of its A/P and/or disbursement functions. There are two common approaches to managing this: ---> 1. A firm may send a data file to a financial service provider periodically, containing a list of all payments to be made. The file contains information on when to issue a disbursement and to whom, as well as instructions on the payment method to be used (e.g., check, wire, ACH, foreign draft, or foreign currency.) ---> 2. the financial service provider may maintain a database of a firm's payees that includes detailed information, such as preferred payment methods, specific remittance info, and the names of receiving financial institutions. The database is updated periodically as payees are added or deleted, or as an existing payee's remittance profile changes. Under this method, when a company needs a disbursement, it sends only limited payment information to the financial service provider. - With either approach, the financial service provider issues the payments immediately or warehouses the items.

Bank overlay structure

An approach that combines both sweeping and pooling. - typically used when a firm's primary bank has branches in several countries, but the branches do not provide a full range of domestic banking services. - a local bank is used to provide collection and disbursement transactions and accounts, and to sweep surplus funds to the primary bank. - the primary bank (overlay bank) then notionally pools or physically transfers cash balances in overlay accounts, providing a multi-country solution. - exact structure of this arrangement will depend on the bank agreement and possible tax considerations.

Annual Cost of Float =

Average Daily Float x Opportunity Cost

ZBAs (zero balance accounts)

Bank accounts in which the end-of-day balance is maintained at zero. - credits and debits that post to the ZBA are netted at the close of each business day. - from the account holder's perspective, if there is a credit balance in the ZBA, then the ZBA will be debited and the master account will be credited. This brings the balance in the ZBA back to zero. - if there is a debit balance in the ZBA, then the ZBA will be credited and the master account will be debited. - funding of the ZBA is generally done automatically by the bank and the appropriate accounting entry is made by the bank and the company to reflect the transfer of funds. - typically disbursement accounts on which a company issues checks, initiates ACH debits, or initiates wire transfers. - can be used for both collections and disbursements. - multi-tiered ZBAs may be used by firms with multiple divisions or subsidiaries to initiate payments from separate accounts or segregate different types of payments (e.g., A/P Payroll, dividends, and taxes). ---> a treasury professional can control the balances and funding of a master account and that account's associated ZBA's as if they were all one account. ---> This approach reduces excess balances and the need for multiple, manual transfers, while maintaining distinct information and audit trails.

outsourced A/P services

Because of the complexity of many payment types and the need for extensive controls over disbursement activities, outsourcing disbursements is quite common. - Products used to outsource disbursements include: ---> freight payments ---> payroll services ---> integrated or comprehensive accounts payable (A/P) ---> payment factories

Banker's Acceptance (BA)

Can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods. - created when one person signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time to another person, usually to finance the shipment or temporary storage of goods. ---> the unconditional written order, also known as a time draft, is stamped as accepted by the bank. - by accepting the draft, the bank agrees to pay the face value of the obligation if the buyer fails to make payment. - may be held by the bank until maturity or be sold at a discount in secondary markets as short-term negotiable instruments, where the bank's credit standing is substituted for the creditworthiness of the issuer. - the cost of financing BA has two components: the discount rate (rate earned by the investor) and the commission.

Hybrid (wholetail) lockboxes

Combine features of both wholesale and retail lockboxes. - would handle smaller volumes but machine-readable remittance documents.

Direct Deposit via Automated Clearinghouse (ACH)

Direct deposit via ACH has been used widely in the U.S. since the early 1980s for both government and commercial payments, and now is routinely used throughout much of the world. - the introduction of the SEPA credit transfer scheme in the Eurozone and cross-border ACH in other countries has made global use of direct deposit simpler and more acceptable for many firms. - direct deposit via ACH can be used for payroll, employee expense reimbursements, interest payments, tax payments, dividend distributions, and B2B transactions. - two advantages of direct deposit via ACH are the low cost of the transactions and the certainty of timing.

Dollar-days of float =

Dollar Amount x Total Days of Float

Domestic concentration of funds

Domestic cash concentration systems typically transfer funds from outlying depository locations, often at different banks, to a central bank account at a firm's primary bank, commonly referred to as a concentration account. This process is referred to as sweeping. - Retailers accept cash, checks, and payment cards at the point of sale (POS). - The introduction of banking services such as RDC and smart safes has simplified the process by allowing many firms to eliminate most field bank accounts and deposit funds directly into their concentration account. - Most large retailers transmit information on local receipts from POS terminals to headquarters. - One alternative to an ACH payment is a wire transfer. However, because wire transfers are an expensive funds transfer mechanism, they are used primarily to concentrate large dollar amounts when same-day value and finality are critical. - Consequently, a break-even analysis is required to determine the appropriate funds transfer mechanism.

Electronic Disbursement Products

Electronic funds transfers (EFT) via wire transfer and ACH are for B2C and B2B payments, as well as for payments from G2C, B2G, and C2C. - One popular way is ACH direct deposit feature. (cheap way to electronically transfer money) - One of the significant advantages of electronic disbursements is the ability to include remittance information with B2B payments. - more companies are moving away from check to ACH deposits. - types: ---> direct deposit via ACH ---> Tax payments ---> wire transfers ---> card payments

Payment factories

Essentially a centralized A/P processing center. - It is often part of a centralized treasury operation known as an in-house bank, or it may be set up as part of an organization's enterprise resource planning (ERP) system. - often used in multinational organizations with a large number of cross-border payments. - can also be linked to multilateral netting systems or re-invoicing programs in order to reduce the number of transaction between subsidiaries of a company, as well as better control overall exposures from foreign currencies. - to send payments outside the organization, a single payment file from all the operating units can be sent to a global or regional bank, which can then arrange for payments to be made in local currencies to the vendors.

Card payments

Have become an important disbursement method for consumers and for businesses. - if payment cards are used by the firm's employees, it is important to establish and document policies and procedures to provide appropriate controls. - cards used for disbursement purposes include purchasing cards, travel and entertainment (T&E) cards, virtual cards, and single-use cards.

Remote Deposit Capture (RDC)

Involves using a check scanner to capture an image of a check payment, which is then used to facilitate deposit at the depository bank by image deposit. - this service eliminates the need to gather the checks and take them to the bank or send them via mail or overnight courier. (eliminates check transit) ---> this speeds up collection time, reduces the risk that the checks will be lost or stolen in transit, and typically reduces the overall cost of check processing. - As with smart safe, RDC allows a depository bank to service locations that are physically distant from a bank facility, alleviating the need for subsequent cash consolidation from a local field bank. - In some cases, RDC scanners are being incorporated into the electronic safes used for smart safe services, providing a consolidated service for retail organizations. - this product is limited to checks denominated in US dollars.

Commercial L/C

Issued by a bank as the intended mechanism of payment in relation to a trade transaction involving the domestic or international shipment of merchandise. - typically requires presentment of a draft, commercial invoice, and related shipping documents. - banks may serve a variety of roles in L/C transactions: ---> issuing bank: the importer's bank that issues the L/C in favor of the exporter. ---> advising bank: advises the exporter of an L/C in its favor. ---> confirming bank: other banks that may be involved in the transaction. (also called the negotiating bank) - the advising and confirming bank are frequently the same bank, performing dual roles. The two examine the documents presented by the beneficiary (i.e., the exporter), receives payment from the issuing bank, and pays the beneficiary. - Requires the presentment of a draft, invoice, or shipping documents - Referred to as a documental L/C - Ensures cross border transactions and sales

Availability of remittance information

It is important to know who made the payment and why, especially if the payment is for less than anticipated. - in addition to receiving money, you want to make sure it is properly recorded in the company.

Net Benefit of Lockbox =

Lockbox Float Savings - Annual Cost of Lockbox

Internal processing has $99k annual float, 9% opportunity cost, and $3k in variable internal processing. A lockbox has $24m dollar-days in 30 days, $10k in fixed costs, and $6k in variable costs. Which method has the net benefit?

Lockbox: $14k - $24m/30 = $800k - $800k x 0.09 = $72k - $99k - $72k = $27k - $27k - $10k - 6k + $3k = $14k lockbox

Tax payments

Many taxing authorities throughout the world allow electronic payment of various types of taxes. - In the U.S, the Electronic Federal Tax Payment System (EFTPS) is the primary method for collecting and accounting for federal taxes withheld by employers from individuals' salaries and wages, as well as corporate business, sales, and excise taxes. - Sub-sovereign or local taxing authorities are also moving toward electronic payment of taxes. ---> In the U.S., most states require companies with tax payments above certain amounts to remit them electronically. - The standard NACHA payment format for state and federal tax payments via ACH is known as the tax payment (TXP) banking convention, yet usage and specific formats vary from state to state.

Cost of collection

Minimizing the cost of any collection system is important, but the cost must be balanced against the prior items. - cost needs to be weighed against improving speed, security, or remittance info availability.

Fraudulent endorsement

Occurs when an authorized check is stolen or intercepted by a third party, and then that party endorses and cashes the check. - positive pay services cannot protect against this type of fraud. ---> so long as the check amount, the check number, and potentially the payee are not altered, this type of fraud is not usually detected by positive pay. - checks returned for forged or fraudulent endorsement are not subject to the normal next-day return deadline and may be returned upon discovery of the forged endorsement, subject to any agreed-upon limits with the paying bank. - Positive pay, ACH filters and blocks, and daily reconciliations are among the methods most used to help detect and control payments fraud.

retail lockboxes

Process payments that involve machine-readable remittance documents (i.e., "coupons"), such as utility and credit card payments. - these are typically C2B payments and tend to be high volume, which may justify the cost of the equipment used to process and read the remittance documents.

Imprest Accounts

Sometimes used as a petty cash account. - is an account maintained at a fixed amount for a particular purpose or activity. - based on either an established time frame or a designated level of imprest account balances, the field office submits expenses to headquarters for approval, and headquarters replenishes the imprest account and brings it back to the fixed amount.

Security of the payment

The collection system should ensure that the payment is not diverted or stolen during the collection process.

Semi-repetitive wires

The debit and credit parties remain the same, but the description (e.g., a customer or an invoice number) may be changed, along with the date and the dollar amount. - these combine the controls of repetitive transfers with the flexibility of non-repetitive transfers.

Collections

The efficient collection of funds is a key aspect of liquidity management. - the collection system employed will depend upon the nature of the collecting firm and nature of the payee. - key considerations in any collection system: ---> speed of collection ---> security of the payment ---> availability of remittance information ---> cost of collection

cash concentration system

The two major objectives of a cash concentration system are to efficiently move the funds from deposit banks to the concentration bank and to minimize excess bank balances. - Moving all the funds into a single concentration account enables those funds to be managed more efficiently and effectively, and facilitates daily liquidity management. - Concentration of funds enables a firm to: ---> balance excess and deficit cash positions across multiple locations, entities, and currencies. ---> optimize idle balances for offsetting fees or optimizing earnings credits. ---> invest a larger amount of funds, potentially increasing interest income. ---> pay down debt faster and minimize borrowings, potentially reducing interest expense. ---> take advantage of supplier and/or vendor discount terms, potentially reducing the cost of goods sold or operating expenses.

Average Daily Float =

Total Dollar-Days of Float / Number of Days in Period

Wholesale lockboxes

Typically process B2B payments. - do not handle the payment volume of retail lockboxes, the former must handle remittance information that is usually not machine-readable. - treasury professionals tend to use wholesale lockboxes when the dollar value of their payments is high, payment volume is lower, and the remittance info does not include a standardized remittance coupon.

DDAs (demand deposit accounts)

Used to facilitate business activity including the transfer of funds or other payment-related activities. - sample methods of payment include cash, check, debit card, internal book transfer, or electronic transfer.

Repetitive Wires

Used when frequent transfers are made to the same credit parties. - Only the date and dollar amount of the wire change-- all other information remains constant. - The bank or treasury management system used by the treasury professional to originate the wire maintains a record of the debit and credit bank accounts and accepts instructions either electronically or via telephone to initiate the transfer. - A unique identified is assigned to each instruction template that contains all of the standing information. - Since only the date and the dollar amount can be changes on a repetitive wire, this type of transfer provides significant assurance that funds will not be sent to an unknown or fraudulent party.

Standby L/C

Variations of commercial L/Cs. - they are issued primarily by bank s. - once issued, it serves as a vehicle to ensure the financial performance of a bank's customer to a third-party beneficiary. - it is only payable in the event that the primary entity fails to pay or perform some specified duty. - typically requires the presentation of a sight draft and documentation that supports the beneficiary's claim of nonperformance on the part of the issuing bank's customer. - Performance L/C - Bank ensures performance of its customers

Wire transfers

Wire transfers such as Fedwire in the U.S. or TARGET2 in Europe are an important disbursement tool for firms that need to make large-value payments that are immediate and final at the time of settlement. - Most banks provide a number of methods for originating wire transfers, ranging from telephone initiation to online systems. - To meet the needs of corporate users, banks generally classify wire transfers by usage category: ---> repetitive ---> semi-repetitive ---> non-repetitive (free-form) ---> drawdown ---> standing ---> book transfers

Book transfers

Wires between accounts at the same bank. - these transfers do not go through a system such as Fedwire, they are much less expensive than other types of wire transfers.

Payments fraud

`key issue related to disbursements. - disbursement products used to reduce payments fraud include positive pay and reverse positive pay. - Fraudulent endorsement

lockbox

a collection tool in which a financial institution or third-party vendor receives mailed payments at specified post office box addresses, processes the remittances, and credits the payments into a payee's bank account. - assessing the suitability of using a lockbox system or network requires a cost/benefit analysis to determine whether the net benefit of reduced collection float and/or elimination of in-house processing outweighs the incremental costs of lockbox processing. - 3 basic types: ---> retail ---> wholesale ---> hybrid (or "wholetail")

Reverse positive pay

a process whereby the bank transmits a file of the checks presented for payment to the company on a daily or intraday basis. - within a specified time deadline, the company matches this file to a list of checks issued and notifies the bank of any items to be returned. - this service, however, does not prevent fraudulent checks from being cashed at the paying bank teller line (i.e., teller positive pay) since the bank fos not have access to the issue file. - when using a reverse positive pay service, the company and bank must agree on a default action if the company does not meet the required deadline -- that is, should the bank pay all or pay none, bearing in mind that in the case of reverse positive pay, pay none means that all checks presented that day will be returned, not just the exception items. - NOT available for ACH payments.

drawdown wires

a reverse wire transfer. - a request sent by a firm's bank to a second bank requesting that the second bank initiate a wire transfer from either the firm's account or another party's account at the second bank, sending the funds back to the first bank. - the party being debited must pre-authorize the transfer; therefore, these wires are most frequently used as part of a firm's concentration system, since the firm can authorize both sides of the transaction.

Documentary collection

a trade payment mechanism that processes the collection of a draft and accompanying shipping documents through international correspondent banks. - instructions regarding the transaction specifics are contained in a collection letter that accompanies the documentation. - banks involved in these transactions perform different roles: ---> remitting bank: the bank of the exporter, receives the collection documents from the exporter. These documents are then remitted (forwarded) to the importer's bank along with instructions for payment. The importer's bank is referred to as the collecting or presenting bank. ---> collecting or presenting bank: (importer's bank, issuing bank) is the bank that presents the documents to the importer. In exchange for these documents, the bank collects either cash payment in the form of a bank draft or a promise of future payment in the form of a bill exchange. - A collection letter specifies the exact procedures to be followed before shipping documents are released to the importer. The importer usually requires physical possession of the shipping documents in order to obtain the merchandise. Documents are typically released either against payment or acceptance: ---> Documents against Payment (D/P): Use a sight draft, which is a draft payable on demand, that requires the collecting bank to receive full and final payment of the amount owed prior to releasing the documents. ---> Documents against Acceptance (D/A): Use a time draft, which is a draft payable on a specified future date, that must be accepted by the importer before the collecting bank may release documents. Upon maturity of the time draft, it is presented to the importer for payment.

key aspect with both L/C and documentary collection:

banks are only reviewing documents for completion and accuracy of performance, no view of actual merchandise. - Doesn't deal with actual merchandise.

Mail payments

can be processed internally or outsourced to a lockbox processor. - in an internal company processing center, check and/or payment card processing, along with deposit preparation, are performed in-house. ---> the primary advantage of an in-house processing center is that the firm maintains control of the collections operation. ---> disadvantages of in-house are the need to provides appropriate controls, potential processing delays of internal processing, and the need to add staff to handle peak volumes of transactions. - a firm may decide to outsource the processing of card payment information received through the mail due to compliance requirements. (if a firm uses in-house processing for card payments, it must meet PCI DSS requirements)

Physical pooling

funds in separate subaccounts are automaticsllay transferred to/from a concentration account in order to eliminate idle cash and fund cash outflows. - the participating entities are either in surplus or deficit from a transactional perspective, but the bank accounts themselves have a balance of zero. - can be used across multiple legal entities located in the same or different countries, but the funds must be in the same currency and all accounts must be with the same bank. - the funds movement between the participating entities is accounted for via inter company loans, which must be at an "arm's length" or market rate. - there is no requirement that all the accounts belong to one entity, hence the need for inter company loans.

Check conversion

involves scanning the payor's check and converting it to an ACH debit. - the benefit of this is that ACH transactions are typically less expensive than check processing. - checks can be converted at the point of presentment or in a lockbox operation. - check conversion is only available at US banks and is limited to checks drawn on US-domiciled accounts. - Check conversion is limited to consumer checks under $25,000.

disbursement systems

may range from a single bank account for a small business to a very complex system with multiple banks, accounts, payment methods, and products for a large corporation. - disbursement products: ---> DDAs (demand deposit accounts) ---> ZBAs (zero balance accounts) ---> controlled disbursement ---> imprest accounts

payroll services

numerous vendors offer payroll services that handle many payroll functions, including check and direct deposit file issuance, payroll tax filing and payment, expatriate (expat) payroll, and retirement/pension account administration. - these services also provide employees with the required withholding forms for tax purposes. - many small to medium sized businesses outsource payroll because it is often a cost-effective and convenient service.

disbursements, collections, and concentration:

refer to the movement of funds throughout the various working capital accounts.

disbursements

refer to the payment of funds to employees, suppliers, tax authorities, capital markets, etc. - a primary concern in the management of disbursements is control. - are outflows - disbursement processes include both the payment initiation and the reconciliation of the payment.

Domestic collection

refers to payments received from customers and trading partners that are located within the same country as the collecting company. - domestic collection products include: ---> merchant services ---> Remote Deposit Capture (RDC) ---> Check conversion ---> Mail payments ---> Lockbox

concentration

refers to the movement of funds throughout the firm's various accounts following the collection of cash into one centralized account.

Merchant services

refers to the services offered to help in processing credit and debit card transactions. - while they normally refer to the acceptance and processing of card transactions, it also often includes ancillary services such as returns and adjustments, point-of-sale terminals, supplies, and customer support. - merchants that accept mail, phone, or internet orders made with card payments may mitigate their risk of fraud by using an address verification service (AVS) that matches the address provided by the cardholder with the account billing address on record with the issuer.

standing wires

repetitive transfer instructions are established to move funds between two specified accounts automatically when previously determined criteria are met. - typically are used for concentrating funds, and the criteria could address either timing (e.g., all funds in the account at the end of the day) or a designated balance level (e.g., all funds in excess of $50,000)

trade acceptance

similar to a BA except it is drawn on, and accepted by, an importer. - can be used to verify an importer's obligation to pay for purchased merchandise where the exporter is satisfied with the credit risk. - often are used by importers to secure financing from a bank or, similar to BAs, may even be sold to a bank or an investor at a discount prior to maturity.

freight payments

specialists pay all of a shipper's freight bills, audit bills for possible overcharges and duplicate payments, and provide reports that help a company compare costs for different routes and carriers. - manufacturers and wholesale distributors typically use this service.

Speed of collection

the collection system should minimize the time it takes to collect the actual payment and have the funds available for use.

control

the concept is to eliminate fraud and ensure that payments are received at the right time.

non-repetitive transfers

the debit and credit parties are different each time. - because all of the information is variable, this type of transfer has the highest degree of payment risk due to fraud or simple data entry errors. - as a result, additional security measures are typically required to guard against both fraud and input errors. - examples of such measures are callbacks, secondary levels of approval, and segregation of duties. - also referred to as free-form wires.

open account

the most common form of credit extension and collection. - widely used internationally when two trading partners have an existing relationship and essentially trust each other to complete their transaction obligations. - when there is no such relationship, a seller will often require credit risk protection through either a letter of credit or documentary collection.

cross-border collections and trade

the most frequently used cross-border trade payment mechanisms can be explained in terms of increasing levels of protection, complexity, and cost. - open account terms are the simplest and least costly, but offer the least protection for the seller. - documentary collections are more complex and costly, but offer some protection to both parties. - letters of credit, which typically include documentary collection as part of the process, are the most complex and costly vehicles for international trade, but they provide the best combined security for both parties. - other methods include: ---> banker's acceptance (BA) ---> Trade acceptance ---> barter, countertrade, trading companies

Trading companies

used when an exporter sells products at a discount to an export trading company, which then resells the products internationally. - in some cases, a global parent company will create a trading company entity that purchases products and then resells to subsidiaries of the company.