Consignment Purchase Overview
Consignment Purchase is one of the three most basic methods of trade finance, along with Open Account and Cash In Advance. Before the advent of institutionalized trade finance, which opened up a range of trade finance options for importers and exporters, Open Accounts, Cash In Advance and Consignment Purchase were the entirety of trade finance options.
Open Accounts favor importers, who do not have to pay for an order of goods until the order is shipped by the exporter. Exporters, who bear virtually all of the risk with Open Account transactions, try to avoid them and will typically accept Open Account transactions if they have an existing relationship with the importer.
Cash In Advance favors exporters, who receive payment in full for a shipment of goods before they are shipped and perhaps before they are even produced, depending on the nature of the goods. Importers, who bear all of the risk in Cash In Advance transactions are very seldom willing to pay for an order of goods in advance.
Consignment Purchase is the most favorable import financing for the importer. With Consignment Purchase transactions the importer places an order for goods from the exporter. The parties agree on a price for the goods, but payment for the goods isn’t due to the exporter until the exporter produces and ships the goods, the importer receives the goods, and the importer sells the goods to his customer.
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Import Finance Using Consignment Purchase
For importers, a consignment purchase is the lowest-risk import trade finance option. With a consignment purchase, the importer does not pay the exporter for the goods until the goods are sold to the importer’s end customer. Not surprisingly, exporters are almost always reluctant and almost never enter into a consignment purchase transaction because it likely means delaying payment for the goods or not getting paid in full for the goods at all. Consignment purchase transactions are considered highly risky by exporters and are, therefore, rare.
At the other end of the spectrum, cash-in-advance is the riskiest Import Finance option for importers because the importer commits all of the funds up front, with no reliable guarantee that the goods will be delivered. Exporters prefer cash-in-advance, especially if they too are intermediaries who have to pay for goods in advance of receiving payment for their export. Many exporters offer importers discounts if they will pay cash in advance. It is, nonetheless rare for importers to agree to cash-in-advance terms.
Consignment purchases leave all the risk with the exporter, while cash-in-advance terms leave all the risk with the importer. Somewhere between the two, it is likely that a compromise can be struck to make the deal. A reasonable compromise might be a down payment, where the importer pays a non-refundable deposit up-front and the exporter ships the goods on the strength of that deposit. The importer then pays the remainder of the cost when the goods are received in good condition.
Consignment Purchase Key Takeaways
For importers, there is no better way to finance international trade transactions than by consignment purchase. For exporters, a consignment purchase is the riskiest. Unlike most trade finance solutions that, to a certain extent, at least attempt to balance risk in cross-border trade between the importer and exporter, a consignment purchase shifts all of the risk to the exporter. For this reason, it is extremely rare to find an exporter who is willing to extend consignment purchase credit terms to an importer, unless it is to an established customer with whom the exporter is very comfortable.
But when exporters and importers are still early in a relationship, without having yet established a relationship of trust, using trusted intermediaries can mitigate cash flow and credit risks for both sides. Identifying the best trade finance solution for both exporter and importer is a matter for negotiation as part of the trade deal.
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