Direct payment scheme poses another challenge to exporters

CEBU, Philippines - Aside from the softening of the export market due to the global financial crunch and the appreciation of the peso against the dollar, the demand for direct payment instead of the letters of credit (LC) as payment mode is another risk that has been challenging the exporters.

According to Philexport Cebu chair Allan Suarez, the direct payment scheme, which is when buyers pay for the product purchased only days after product delivery, is very risky especially for the new exporters and for those that have new clients.

“Direct payment entails confidence and trust on your buyer. If the exporter and the buyer already have a [long-time] relationship, then direct payment is okay but if the [trade relationship is new,] it is very risky. There are a lot of things that could happen [within the production period such as cancelled orders or after the delivery of the order] such as [questions on] quality [that may result in non-payment of orders,]” he told The Freeman.

Suarez said foreign buyers prefer direct payment over LC as their money is locked in the bank and non-performing for months in the latter payment scheme. LC is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. The buyer has to deposit the amount in the said bank.

“Buyers are more willing to give downpayment rather than [opt for] LC,” he said.

Suarez recommends the LC mode of payment for new exporters and those exploring new markets, especially the small ones.

Meanwhile, Ramir Bonghanoy, president of the Cebu Gifts, Toys and Housewares Manufacturers and Exporters Association said the LC payment scheme is a complicated process. This is why his exporting company, Bon-Ace prefers asking for 50-percent downpayment before production. The remaining 30-percent and 20-percent shall be paid as soon as the container van bearing the products leaves the port and when the goods are received, respectively.

He said this is a choice of the company but buyers also request this kind of payment.

Suarez said LCs are more applicable to exporters with big orders. LCs are also more exposed to currency fluctuation because the exporter use the current value of the dollar to the peso, which changes daily in a country with a volatile currency market like the Philippines, in quoting the products based on an estimated production cost. The exporter will lose if the dollar appreciates.

The Bangko Sentral ng Pilipinas (BSP), in its Circular No. 594, is encouraging exporters and other corporations and individuals with foreign exchange-denominated assets to hedge or secure their transactions against foreign currency risks to cope with the adverse effects if and when the peso appreciates as BSP is not keen on controlling the country’s currency market.

The circular aims to promote the use of hedging instruments by setting risk management guidelines to ensure that banks have the capacity and ability to manage risks arising from engaging in hedging.