Australian manufacturing exports to ASEAN: linking country, customer and enterprise risk in method of payment choice

Abstract

In international trade transactions one of the primary concerns of exporters is payment for goods sold to foreign buyers. Country risk and customer risk are two components of the exporter’s overall credit risk. One effective means of reducing these risks is through the choice of an appropriate method of payment. There are four traditional methods of payment: prepayment; letter of credit (L/C); bill of exchange; and open account. It is commonly accepted that L/C provide the most secure method of payment, where the buyer’s credit risk is substituted with that of their bank. The L/C issuing bank provides a conditional guarantee of payment that relies on the presentation of specified data contents on identified documents, to trigger payment. Focusing on firms’ internal processes and based on data gathered from voluntary survey and semi-structured interviews, this paper discusses how Australian manufacturers exporting to ASEAN determine the method of payment of choice, and to what degree L/C are used, in the context of country risk and customer risk assessment. The paper concludes that most firms have a potentially higher risk exposure as, in the majority of cases, enterprise risk management principles are not adopted in the choice of a method of payment.