INTRODUCTION
Background of the study
In the age of globalization, international trade, particularly import and export activities, is rapidly evolving and serves as a crucial driver of economic growth for countries worldwide These activities are essential for wealth accumulation and alleviating national debt burdens, making them a priority for nations of all sizes and development levels As countries engage in a competitive race to enhance their import-export capabilities, Vietnam is actively participating in this trend By stimulating trade and opening its economy, Vietnam aims to achieve significant socio-economic objectives and improve the quality of life for its citizens Since becoming a member of the WTO, Vietnam's import-export activities have surged, reflecting its integration into the global economy.
In the ever-evolving landscape of global trade, international payment plays a crucial role in import-export transactions between companies across nations For import-export businesses, effective international payment processes are vital to each stage of their operations, as they significantly influence capital turnover, investment strategies, and overall profitability Therefore, understanding the implications of international payment and its practical application is essential for businesses aiming to optimize their financial performance in the global market.
Effective management of international payments requires managers to analyze potential risks, including exchange risk, credit risk, and interest rate risk, to implement preventive measures Mitigating financial risks in the import-export sector, especially regarding international payments, is essential for all businesses Consequently, thorough research and analysis are crucial to develop optimal solutions that facilitate business operations, enhance capital efficiency, and increase profitability.
Research reasons
A robust international payment infrastructure is essential for businesses, as it facilitates favorable negotiations and the execution of foreign trade contracts, enhances reputation, and broadens business relationships Therefore, it is crucial for companies to thoroughly consider, analyze, and evaluate international payment processes in their contracts Recognizing the significance of international payments in foreign trade, I have chosen the topic “Solutions to Limit and Prevent Risks in International Payments at Vicofood VN., JSC” for my graduation thesis during my training at VICOFOOD VIET NAM TRADING EXPORT AND IMPORT JOINT STOCK COMPANY.
Objectives of the study
This study aims to thoroughly examine international payments by analyzing the current practices at Vicofood and identifying potential disadvantages that could impact business outcomes Following a comprehensive discussion of the findings, the research will offer recommendations to mitigate and prevent risks associated with international payments.
Significance of the study
This research paper examines the current challenges and limitations faced by Vicofood in international payments It proposes solutions aimed at enhancing the efficiency of Vicofood's international payment operations moving forward Additionally, the findings will serve as valuable resources for similar business models, economic researchers, and students.
Scope and limitation of the study
- Subjects of the research: the study will concentrate on researching international payment activities of Vicofood
This research focuses on three primary international payment methods utilized by the company during the period of 2018 to 2020, rather than exploring all existing payment options.
Due to the COVID-19 pandemic, face-to-face interviews with company staff were not feasible, limiting the depth of understanding regarding specific risks faced by the organization This study highlights certain risks and analyzes their impact on operations, but it emphasizes the need for more comprehensive data to generalize these risks at a macro level Additionally, the complexity of international payments necessitates extensive time and research to fully grasp the intricacies involved.
Definition of terms
International payments involve the fulfillment of payment obligations and the right to receive monetary benefits stemming from both economic and non-economic activities between two parties, whether from the same or different countries, and their associated banks (Nguyen Van Tien, 2011).
- Risk is future uncertainty that differs from expectation (The Economic Times)
- Risk in international payment is the risk arising in the working process of international payment, involving international transactions (Doan Thi Hong Van, 2009)
REVIEW OF RELATED LITERATURE
The role of international payment
International payment plays a crucial role in the advancement of the global economy, serving as the final step in the production and distribution cycle of goods When effectively implemented, payment systems can enhance the recorded value of imports and exports, significantly contributing to remarkable economic growth.
International payments are crucial for the growth of international trade, serving as a catalyst for enhancing both domestic and foreign economic relationships (Nguyen Van Tien, 2011) Additionally, by overseeing international payment activities, governments can identify and address shortcomings in the legal framework and policies governing these transactions.
In the realm of small-scale import-export businesses, international payment serves as the final stage of the transaction process, effectively completing the cycle of goods and services exchange (Dinh Xuan Trinh, 2002) Properly managing payment can enhance business efficiency and maintain financial stability Given the complexities of foreign trade, including geographical distances and variations in political, economic, and social practices, the significance of international payment is amplified The intricacies involved in these payment activities introduce various risks that can arise unexpectedly, necessitating stringent safety measures to safeguard import and export contracts and ensure timely goods recovery for continued production and profit generation Ultimately, effective payment processes reflect the economic efficiency and financial strength of businesses, underscoring the critical role of payment in the national economy.
Terms of payment
Choosing the right payment method is crucial in international trade, as highlighted by Jiménez (2012), who identified two key risks: the potential inability of the exporter to pay and the unsatisfactory quality of goods shipped Therefore, both exporters and importers must carefully evaluate factors that influence their payment options Syoum (2009) emphasizes three main considerations: the recent credit report of the trading partner, the political and economic situation in the partner's country, and the strength of the relationship with the partner.
(2015, 38) claimed that the types of goods and banking network system serving importers and exporters in their countries are also other factors affecting the decision
Implementing this crucial step is essential for companies to mitigate the risks commonly associated with international trade According to Seyoum's studies (2009), Figure 1 illustrates the various risks linked to each payment method for both exporters and importers.
Figure 1: The level of risk in international payment (Seyoum, 2009)
According to Jeménez (2012), there is a significant connection between the trustworthiness of trading partners and the cost associated with payment methods When business partners have a higher level of trust in one another, the payment processes tend to be less costly and less complex.
Companies engaged in international trade have four payment options: Cash in Advance, Open Account, Letters of Credit, and Documentary Collections Cash in Advance and Open Account can be facilitated through International Wire services (T/T service) Each payment method carries varying levels of risk, which differ based on whether the company is importing or exporting.
The following content will show common methods that are used for making payments in international trade
When both parties agree to cash in advance, the importer must make full or partial payment prior to shipping, as per the signed contract This payment method is commonly used when the importer's credibility is questionable or when their country's political and economic conditions are unstable (Seyoum 2009) It is crucial to utilize this method only when the exporter is deemed reliable and trustworthy Therefore, both parties should conduct thorough research about each other before proceeding with this payment arrangement.
Figure 2 : The process of cash in advance
A documentary collection, also known as a documentary draft, necessitates the involvement of a remitting bank for the importer and a collecting bank for the exporter, facilitating the forwarding of documents and the release of payment The fundamental steps of the documentary collection payment process are illustrated in Figure 3.
Figure 3: Documentary collection process ((Seyoum 2009)
The transaction for this method can be documents against payment or documents against acceptance The table below will point out the main differences between these two methods
Documents against Payment Documents against Acceptance
After the importer settles the payment, they must accept the draft to confirm that the goods will be their property Payment is required to be completed before the transfer of ownership.
The ownership of the shipped goods transfers to the importer once the company settles the payment for the draft with the collecting bank.
A sight draft necessitates immediate payment from the importer upon receipt of the bill of exchange, while a time draft specifies the period within which payment is to be made In contrast, a day draft indicates the exact due date for the payment.
Payer The collecting bank is obliged to -If the draft is sent and accepted make the payment by the bank, it is bank acceptance
The bank shall make the payment -If the draft is sent to and accepted by the importer, it is called trade acceptance The company then shall make the payment
The risk of nonpayment can arise during the delivery period or, in some instances, after the goods have been inspected if the acceptance of the draft continues to be delayed.
- In cases when the importer is not allowed to examine the goods shipped before paying the draft, the importer might be dissatisfied by the bad quality of the goods
Table 1: Comparison Documents against Payment and Documents against
The documentary collection payment method offers significant benefits for both exporters and importers For exporters, it allows them to maintain control over the delivery of goods until the importer accepts them and agrees to payment Importers may also have the opportunity to inspect the goods before finalizing the payment However, this method can be complex due to the extensive documentation required from exporters, importers, and banks, necessitating careful attention to detail and prompt document delivery to avoid delays Additionally, political changes or shifts in national import regulations can lead to unexpected customs clearance issues for both parties This payment method is typically utilized when there is mutual trust between importers and exporters or when goods are in limited supply, ensuring a secure payment process.
A letter of credit, also known as documentary credit, is a secure payment method where a bank or financial institution acts on behalf of the buyer to ensure payment to the seller The bank designated by the buyer is referred to as the issuing bank, which may either pay the seller directly or through an intermediary, often known as the confirming bank.
Figure 4 Letter of Credit payment process (Seyoum 2009)
A letter of credit can be classified as either revocable or irrevocable, influenced by the importer’s financial stability and the political economy of their country (Seyoum 2009) A revocable letter allows the importer to modify or cancel payments without notifying the exporter, while an irrevocable letter requires all parties to be informed before any changes are made Importantly, adjustments to an irrevocable letter must occur before its expiration date (Seyoum 2009) This method is considered the second safest as it enables exporters to be alerted about potential payment delays and allows importers to verify the quality of goods before payment Sellers receive payment once all necessary documents are accurately submitted to the bank However, the use of letters of credit comes with disadvantages, including banking fees and the requirement for the importer to demonstrate financial capability, often necessitating a deposit Additionally, the reliance on extensive documentation means that accuracy is crucial to prevent late or unpaid transactions.
Open account is defined as a contractual relationship where an exporter extends trade credit to an importer, requiring payment within an agreed timeframe (Seyoum, 2009) This payment method poses the highest risk for exporters, necessitating a thorough assessment of the trading partner's financial stability, trustworthiness, and the importing country's economic conditions (Ramberg, 2008) It is most suitable for established trading relationships involving small quantities and mutual trust, allowing importers to sell goods before receiving the shipping invoice and use the proceeds for payment.
Exporters should consider obtaining credit insurance to safeguard their companies against commercial and political risks The process of open account payment is illustrated in Figure 5.
Figure 5: Open account process (Seyoum 2009)
Type of risks in international payment
Risks are inherent in all aspects of life and human activities, leading to unpredictability and uncertainty Defined as adverse or unexpected events that result in loss, risks often pertain to the loss of physical assets due to both internal and external vulnerabilities However, as noted by The Economic Times, risk also encompasses future uncertainties that deviate from expectations, suggesting that investments can yield profits despite associated risks.
International payment risk, as defined by Doan Thi Hong Van (2009), refers to the potential issues that arise during the international payment process, which encompasses various international transactions This risk can stem from the interactions between involved parties, including importers, exporters, banks, and organizations, as well as external factors such as natural disasters, wars, or political instability.
In the import-export business, transactions between sellers and buyers from different countries often face challenges such as language barriers, varying laws, foreign trade policies, and differing currencies Each nation has its own foreign exchange management regime, complicating international payments further, especially given the geographical distance between importers and exporters, which prevents simultaneous delivery and payment Today, international payment processes are increasingly complex due to the volatility of the global monetary market, leading to uncertainties and risks in cross-border transactions Consequently, both exporters and importers must implement strategies to mitigate these risks associated with international payments.
Investors face the risk of unfavorable fluctuations in foreign currency exchange rates, which can lead to a decrease in the value of their investments (Scott, 2003).
Foreign exchange risk is a significant financial risk faced by import-export companies due to their reliance on multiple currencies for international transactions (Ha, 2018) When a trade is finalized, the resulting profit or loss is denominated in foreign currency, necessitating conversion back to the investor's base currency Fluctuations in exchange rates can negatively impact this conversion, leading to lower returns than anticipated Import/export businesses are particularly vulnerable to this risk through their accounts payable and receivable, which are influenced by currency exchange variations This risk arises from contracts that stipulate specific prices for goods or services and set delivery dates.
If a currency’s value fluctuates between when the contract is signed and the delivery date, it could cause a loss for one of the parties (Akhilesh, 2020)
To effectively manage risk, it is essential for companies to forecast exchange rate fluctuations This proactive approach enables businesses to safeguard themselves against unfavorable foreign exchange movements.
Interest rate risk refers to the potential financial impact on businesses due to fluctuations in interest rates (Harvey, 2011) Import-export companies frequently encounter this risk in international payments, as changes in market interest rates can significantly affect their costs and revenues, directly influencing their overall international transactions (Hoang Manh Ha, 2008).
In the IM-EX business, securing funding from commercial banks is crucial, as fluctuations in export finance interest rates directly impact cost calculations, income projections, and overall business efficiency.
Fluctuations in market interest rates can negatively impact a company's payment activities, leading to decreased efficiency in its business operations.
Counterparty or credit risk refers to the potential loss arising from the inability to collect accounts receivable, particularly in international trade This risk is especially significant for export companies that deliver goods while relying on importers to fulfill their payment obligations When importers default, it jeopardizes the efficiency of international payments and the financial agreements in place Moreover, credit risk can compound with exchange rate and interest rate risks, further threatening the financial stability of import-export businesses.
Therefore, the measures to prevent foreign exchange risk, interest rate risk and credit risk should be systematically designed, showing the relationship of these types of risks
When shipping goods, whether internationally or domestically, it's crucial to be aware of potential risks such as contamination, seizure, accidents, vandalism, theft, loss, and breakage To safeguard your shipments, ensure you have adequate insurance coverage before dispatching any goods to your buyers.
The International Chamber of Commerce has established guidelines outlining the responsibilities of parties engaged in international trade concerning shipping risks It is essential to review these rules and implement necessary precautionary measures to ensure safe and efficient trade operations.
Political risk, often referred to as territory risk, involves potential financial losses for investors due to changes in a country's political environment or policies, including tax regulations, tariffs, and profit repatriation restrictions For instance, companies may face significant losses from expropriation, stricter foreign exchange regulations, or heightened credit risks if governmental policies hinder their ability to meet financial obligations.
Maintaining high ethical standards is crucial when providing products or services in a global market, as moral risk arises when a party intentionally neglects their responsibilities, impacting others' interests This issue is particularly significant in international payments, where parties often cannot meet in person, leading to asymmetric information and a lack of understanding regarding each other's financial status, business activities, and trustworthiness Consequently, this can result in poor decision-making and increased payment risks In the context of documentary credit governed by UCP 600, payments rely solely on documentation, which can be exploited by some organizations or individuals, highlighting the moral risks present in international commerce.
Legislative risk occurs when there is a dispute or claim coming from the involved parties The issue raised is which country’s court is going to handle the cause and which
Legislative risk arises from the disparities in legal environments and laws among different countries, as highlighted by Capela & Hartman (2011) Regardless of the chosen international documentary credit or payment method, such as UCP-600, transactions are ultimately governed by the legal systems of the respective countries involved.
METHODOLOGY
Data collection
This research aims to identify measures for mitigating risks in international payments at Vicofood by employing a quantitative research method This approach is essential for analyzing the company's current import-export activities through numerical data, facilitating the development of precise and effective solutions for various risk types Additionally, relying solely on qualitative methods would introduce subjectivity and limit the generalizability of the findings.
The data will be collected in 2 ways: primary data collection and secondary data collection
- Primary data collection: online interview
In light of the ongoing COVID-19 pandemic, I conducted online interviews to gather insights from an employee in Vicofood's import and export department The primary objective was to identify the specific risks Vicofood is currently facing, which would facilitate a better assessment of these risks and the development of effective solutions The interviewee, responsible for international payments at Vicofood, provided valuable perspectives on the challenges encountered and the strategies implemented to mitigate them The discussion centered on real examples of risks the company has faced and the measures taken to avoid potential pitfalls.
Question 1 What are common risks in IP Vicofood has to face?
Question 2 Why do risks happen?
In light of the challenges posed by the pandemic, I reached out via email to three individuals from Vicofood's import and export department for interviews Fortunately, one interviewee, who has five years of experience with the company, responded positively.
Secondary data will be gathered from the company's financial statements, balance sheets, and business results for the years 2018, 2019, and 2020, along with insights from the company's research activities Additionally, credible textbooks and reference materials will be utilized to ensure comprehensive data collection All information will be verified for accuracy and transparency.
Data analysis
This thesis will use three analysis method to clarify status and issues
This research analyzes the value and number of contracts, along with the usage proportions of various payment methods from 2018 to 2020 By comparing these data, the study aims to evaluate the effectiveness of different payment methods for diverse customers, ultimately assisting the company in enhancing its international payment options.
This method will gather essential data and regulations provided by the government, including exchange rates and lending interest rates The research will identify the primary risks facing Vicofood and analyze the underlying causes of these risks, as well as the potential losses or damages to the company's business operations.
- The actual case study analysis:
The author examines the current context of various risks and provides insights on each type They specifically address the potential risks associated with payment operations and propose effective solutions to mitigate these risks.
Reliability and Validity
Reliability indicates the consistency of results, ensuring that outcomes remain the same under identical conditions, regardless of the analytical methods employed (Saunders & Lewis, 2009) This research achieves high reliability by utilizing data from the company's accounting department, which is known for its accuracy and dependability.
The study's validity is limited by having only one interviewee; however, this individual possesses significant experience and insight into the relevant issues To enhance validity, interviewing additional staff would be beneficial The research focuses on managing risks in international payments for Vicofood, and comprehensive information regarding import-export activities and payment methods has been thoroughly analyzed.
Research ethics
Morality plays a crucial role in the educational environment, particularly concerning plagiarism, which represents a breach of ethics and honesty To uphold academic integrity, all data and information referenced in this research will adhere to the APA 6th format Additionally, participation in interviews is entirely voluntary, with responses utilized solely for research purposes.
FINDINGS AND ANALYSIS
Overview of business results and payment international method
4.1.1 Overview of the company’s business result (2018-2020)
Value % Value % Value % Value % Value %
Unit: million VND Source: Financial annual report( 2018-2020)
Table 2: Business statistics at Vicofood (2018- 2020)
Total revenue Total cost Earnings
Fingure 6 : Business statistics at Vicofood (2018- 2020)
The table and chart depict Vicofood's business performance from 2018 to 2020, highlighting significant fluctuations in total revenue, total cost, and earnings throughout this period.
In 2019, Vicofood's total revenue reached 51,389.3 million VND, slightly decreasing by 0.04% compared to 2018 However, profit rose from 1,104.3 million VND to 989.2 million VND, marking an 11.63% increase since 2009 This profit growth was primarily driven by the company's strategic cost-cutting measures in its underperforming utility and retail stores, resulting in a total cost of 50,285 million VND, a reduction of 0.2% from the previous year Overall, Vicofood successfully met its objectives and significantly boosted its profitability.
In 2020, Vicofood faced significant challenges as both revenue and profit declined sharply, with revenue dropping by 63% to 31,421.1 million VND and total profit decreasing by 38% compared to 2019 The volatility of the global economic situation, exacerbated by the Covid-19 pandemic, severely impacted import-export activities, hindering Vicofood's ability to acquire new customers and maintain existing ones In response, Vicofood implemented measures focused on cost optimization, including reducing labor, management, and investment costs, while also cutting unnecessary expenditures such as travel and restructuring expenses These strategic decisions were crucial for the company's survival during a tumultuous economic period.
External factors significantly influence a company's operations, alongside internal costs and factors In 2020, Vicofood successfully navigated challenges and achieved profitability despite a complex economic landscape To ensure its survival, Vicofood must remain vigilant in making informed decisions that enhance revenue and profit.
4.1.2 Overview of the payment organization for import-export activities of the company
From 2018 to 2020, Vicofood is a loyal customer of two main banks: Joint
Stock Commercial Bank for Foreign Trade of Vietnam (VCB) and Joint Stock
Commercial Bank for Investment and Development of Vietnam (BIDV)
Payment value for imported and exported goods bank
Unit: million VND (Source: Vicofood Planning Department)
Table 3 Payment value of exports at banks over 3 years (2018 – 2020)
Table three illustrates that over a three-year period, Vicofood primarily conducted its transactions through VCB, which consistently represented approximately 60-70% of the company's total payment value In 2020, Vicofood's overall payment value reached 20,861 million VND, with VCB accounting for 15,900 million VND, or 76.2% of this total Additionally, BIDV played a significant role in Vicofood's payment operations, facilitating over 11 million VND in 2018 and 20 million VND in 2019 Both banks are recognized as leading financial partners for the company.
In Vietnam, 22 banks have mitigated various risks associated with the company's payment activities The strong relationships established with these banks facilitate smoother payment processes, including efficient document transitions and prompt execution of transactions, ensuring timely financial operations for the company.
In the export business, the documentation process during the payment stage is crucial for contract fulfillment After goods are delivered, it is essential for companies like Vicofood to prepare the necessary documents for settlement Vicofood primarily utilizes three payment methods: money transfer (T/T), documentary collection, and documentary credit The choice of payment method depends on the financial capabilities and characteristics of customers in various markets, as well as the maturity time By selecting the most suitable and convenient payment option, Vicofood ensures a smooth transaction process for both foreign partners and themselves, acknowledging that each method entails different operational procedures.
The company employs the T/T after shipment payment method for long-standing customers with a strong financial background and a reliable payment history.
(1) After signing a contract agreement, Vicofood deliveries goods and documents to the importer in accordance with the commitment
Importers require their remittance bank to process payments by providing essential details, including the name and address of the sender, bank transfer account number, remittance amount, beneficiary's name and address, beneficiary's account number, payment bank name, reason for the remittance, and any relevant documentation.
(3) The remittance bank will settle 100% value of goods to VCB which is the bank serving Vicofood The remittance bank make entries in the form of wire transfer
(4) VCB makes payment to Vicofood
Vicofood utilizes a CAD payment method, akin to T/T, primarily with trusted customers This approach requires clients to pay 10-30% of the contract value upfront Following the delivery of goods, Vicofood provides the necessary documentation for customers to settle the remaining contract amount BIDV serves as the banking partner for Vicofood in this payment process.
Figure 8 :CAD method process at Vicofood
(1) After entering into the contract, customers will have to pay X % of the contract value in advance to Vicofood (X according to contract, normally 10%- 30%)
Vicofood handles the delivery and prepares the necessary payment documents as per the contract These documents are sent to the customer, who then proceeds to pay the remaining 70% of the contract value through their bank.
(3) Presenting bank transfers money to BIDV
Vicofood employs a balanced payment method that mitigates both benefits and risks for exporters and importers, making it ideal for new customers in emerging markets with substantial contract values This method utilizes irrevocable at-sight Letters of Credit (L/C), allowing for flexible payment arrangements Typically, customers initiate payment upon receipt of appropriate documents, but in instances where documentation is delayed, they may pay 20% of the contract value upfront, with the remainder due once the goods are loaded Due to the complexity of this method and the stringent regulations governing document deadlines and validity, Vicofood diligently monitors L/Cs to ensure seamless payment processes For most transactions, Vicofood selects VCB as its advising bank.
Figure 9 : L/C payment process at Vicofood
(1) Customers apply to open L/C and submit to the bank the necessary documents necessary, make deposits as required for the bank to give L/C to the beneficiary
(2) The L/C issued and transferred the L/C to the company's L/C notification bank VCB
(3) VCB receives and inspects L/C, if appropriately, the original L/C will be transferred to Vicofood for the company to conduct feasibility checks and make adjustments if any
(4) The company makes documents in accordance with the provisions of L / C to claim goods, documents consist of 3 sets for customer, bank, company
(5) VCB after checking the validity of the documents will be sent to the open goods L/C
(6) The bank opens L/C to check the documents if it sees fit, it will transfer funds to Vicofood's account at VCB
(7) The L/C issued the documents to Olam International and issued a demand for money
(8) Customers check documents if they see fit, then carry out payment procedures
(9) Vicofood receives payment from VCB.
Current status of payment activities at vicofood
4.2.1 According to the export situation
The payment activities of the company are influenced by its export situation, which is determined by the number and value of signed contracts The table below illustrates the utilization of the company's payment methods over a three-year period from 2018 to 2020.
(million % (million % (million % (million % (million %
VND) VND) VND) VND) VND)
(Source: Vicofood Import-Export Planning and Business Department)
Table 4: The situation of using payment methods over 3 years (2018-2020)
Figure 10: Structure of using payment methods according to contract (2018-2020)
Figure 11: Structure of using payment method according to payment value
The data indicates that Vicofood predominantly utilized L/C as its primary payment method, consistently representing over 60% of both the total contract value and the number of payment contracts throughout the analyzed period.
In 2018, Vicofood significantly expanded its export market by securing numerous high-value contracts, particularly in Africa Notably, over 81% of these contracts utilized letters of credit (L/C), which contributed to an impressive 71% of the company’s total export value for the year.
By 2019, L/C payment contracts saw a 19% decline, while T/T and CAD contracts increased due to a slight decrease in import demand in new markets However, traditional customers experienced an improvement, with a significant rise in both the number and value of T/T and CAD contracts The company continues to prioritize L/C payment methods, especially in its long-term development efforts in new African markets, where L/C accounts for over 60% of the quantity and value of payment contracts.
In 2020, Vietnam's export markets faced significant challenges due to the coronavirus outbreak, resulting in fluctuating prices throughout the year Initially stable, prices fell sharply mid-year before rebounding towards the end This uncertain market environment led to a substantial decline in both the number and value of contracts signed by companies, dropping over 50% compared to 2019 However, through efforts to sustain traditional markets and explore new opportunities, alongside government support, the number and value of contracts paid via Letter of Credit (L/C) remained relatively stable compared to 2019, while payments made in Cash Against Documents (CAD) increased.
In recent years, the use of T/T and CAD payment methods has seen an overall increase in both the number and value of contracts, despite a significant decline in 2020 due to challenging domestic and international market conditions However, the L/C payment method continues to dominate in terms of both quantity and value, establishing itself as the preferred choice for the company in international transactions, particularly for new customers looking to mitigate payment risks.
4.2.2 According to the export market
The Asian market is the company's traditional export market with partners mainly from Singapore, China, the Philippines, East Timo, Malaysia,
Vicofood values its Asian customers, who typically come from economically and politically stable countries with developing industries, ensuring reliable payment capabilities The proximity of these markets to Vietnam facilitates efficient information exchange and partnership development, as they share similar payment conditions and commercial customs This geographical advantage allows for quicker shipping and reduces costs, particularly when using the L/C method, which can be time-consuming due to document verification and transfer.
Therefore, customers from the Asian market are considered as dominant and important customers of the company
(million % (million % (million % (million % (million %
VND) VND) VND) VND) VND)
(Source: Vicofood Import-Export Planning and Business Department)
Table 5: The situation of using payment methods in Asian market (2018-2020)
The chart illustrates the evolving payment trends in the Asian market, highlighting the company's strategic use of three payment methods Notably, the number of contracts settled through T/T and CAD is on the rise, while L/C payments are declining In 2018, L/C payments represented 66% of all contracts in this region, indicating a significant shift in payment preferences.
2019 and 2020 only about 30% of the number of contracts paid by this method
In the Asian market, T/T payment method led in contract value, representing over 50% of total export value, while L/C accounted for more than 40%, and CAD made up a smaller portion This data highlights the strong relationship between the company and its Asian partners.
The choice of payment method is influenced by contract negotiations, financial capacity, maturity periods, and contract sizes Given that partners in Asia are established and familiar clients, T/T or CAD payments are often preferred over L/C However, for contracts with significant values, the company opts for L/C alongside other payment methods to ensure timely payments and mitigate potential risks.
This is a new and potential market for the company, its main partners from countries such as Ivory Coast, Senegal,
Africa imports over $1 billion worth of rice annually, with Vietnam's rice exports constituting around 20% of this market due to the region's significant food demand driven by extreme weather, resulting in frequent crop failures and famine This market is appealing as it has less stringent quality requirements compared to Europe and offers straightforward payment processes for suppliers like Vicofood, who only need to prepare the proper documentation for immediate payment However, the geographical distance between Africa and Vietnam leads to high shipping costs and longer delivery times.
The company's ability to negotiate export contracts is significantly hindered by limited market information and buyer insights, leading to challenges in achieving favorable terms Additionally, high intermediary fees contribute to persistently low export profits.
Despite the numerous challenges faced, Africa remains a significant and appealing market for rice exporters, especially in light of the intense competition and saturation in traditional markets.
(million % (million % (million % (million % (million %
VND) VND) VND) VND) VND)
(Source: Vicofood Import-Export Planning and Business Department)
Table 6: The situation of using payment methods in Africa (2018-2020)
The table highlights significant disparities in the Asian market, particularly in Africa, where the company predominantly relies on L/C payments, constituting over 90% of total payment contracts The absence of T/T payments in this region is due to high associated risks Contract values in this market were relatively low, with figures of 21,460 million VND in 2018 and 27,449 million VND in 2019 This data indicates that the company has effectively executed its strategy to expand into new export markets, capitalizing on the potential of large contracts in these emerging regions.
L/C is completely reasonable because it ensures the rights and benefits of two parties
In the African market, CAD payment contracts are limited, representing only about 5% of the total payment value While the CAD method offers fast and convenient transactions, it carries significant risks Therefore, the Letter of Credit (L/C) remains the most reliable payment option for companies looking to establish a presence in this region.
CONCLUSION AND RECOMMENDATION
Conclusion
Risks are an inherent part of life and business, particularly in the wake of challenges posed by the Covid-19 pandemic Despite these obstacles, the company has continued to thrive and reach notable achievements This success can be attributed to the company's relentless efforts in all aspects of production, business activities, and executive management, including the crucial area of international payment processes, which are essential for facilitating transactions.
Effective risk management enables the company to minimize expenses and expedite payment times while maximizing revenue and profitability, directly influencing business outcomes An analysis of the company's payment methods from 2018 to 2019 reveals a stable payment activity, though it still faces unexpected risks Over 70% of contracts are settled via Letters of Credit (L/C), primarily with new customers in Africa, while traditional methods like T/T and CAD are more common among regular customers in Asia, offering quicker and more cost-effective solutions Notably, the incidence of late payments has been minimal, with only a small percentage of contracts experiencing brief delays.
Vicofood has successfully implemented effective and efficient payment methods, despite the inherent risks involved With a strong reputation for credibility and responsibility, the company has proactively planned for potential risks, ensuring that it can respond flexibly to any unexpected situations that may arise.
Recommendation to Vicofood
5.2.1 Solutions for payment methods at the company
In import and export contracts, payment terms are crucial, with the method of payment being particularly vital Vicofood company typically employs documentary credit due to its advantages, including faster transactions, enhanced security, and reduced disputes Despite being the safest option for both importers and exporters, documentary credit can sometimes lack reliability, leading to dissatisfaction among long-standing customers of Vicofood Consequently, it is essential for Vicofood to diversify its payment methods to better accommodate the needs of its clients.
To select a suitable and secure payment method, managers must assess the customer's classification, trustworthiness, solvency, and the total contract value For high-value contracts, utilizing documentary credit is essential, while for smaller contracts, the choice of payment method should depend on the customer's reliability and financial stability For example, Vicofood, familiar with the importer's reputation and financial capacity, may opt for the collection of documents instead of a letter of credit (L/C), ensuring effective receivable account management and reducing costs associated with L/C.
When selecting a payment method, it's crucial for managers to effectively engage with customers to facilitate contract signing, as the negotiation process can often be prolonged and challenging before reaching a new agreement.
- Because the company always uses T/T after payment and CAD 30% in advance, it should note specifically the payment time, the payment value, if possible, additional
54 provisions such as: late payment penalties or extended payment periods in error to minimize intentional late payments and late payments of customers
To effectively enter new markets like Africa, the company should restrict the use of CAD for payments, reserving it for trustworthy partners with a proven trading history Additionally, contracts utilizing this payment method should be limited to low-value transactions, and payment terms should be kept relatively short to mitigate risk.
Vicofood primarily utilizes Letters of Credit (L/C) to manage payments with customers in Africa, aiming to minimize risks associated with the region's underdeveloped banking system However, challenges persist as many African customers are the ones opening L/Cs To navigate these risks effectively, Vicofood must negotiate and select a reputable bank to issue L/Cs for commercial transactions within the African market.
To ensure timely settlement activities in accordance with L/C conditions, it is essential to maintain effective coordination among relevant units and departments involved in the implementation of export contracts.
In the L/C tracking process, companies must prioritize not only the negotiation of L/C terms but also the sale contract's conditions It's essential to agree to terms that align with UCP and ISBP regulations while remaining realistic about potential unforeseen delays in document presentation By enhancing inspection and consistently monitoring contract progress, along with maintaining regular communication with both the buyer and their bank regarding maturity extensions, companies can develop effective strategies to navigate challenges.
Relationship between Vicofood and banks is very important, it affects directly methods and terms to pay through banks and also has a strong influence on Vicofood’s operational efficiency
When utilizing a Letter of Credit (L/C) for contracts, COMA-IMEX may need to provide security that can reach up to 100% of the contract's value However, a strong relationship between Vicofood and its banks can lead to reduced security rates, with banks potentially financing the full amount In cases of errors in the L/C, banks will promptly advise the company on necessary edits, helping to save both time and costs A solid rapport with banks also facilitates easier access to guidance for Vicofood during the L/C process.
When importing goods, if the products arrive before the necessary documents, Vicofood can submit a request to banks for security to facilitate immediate importation Conversely, if the relationship with the banks is strained, it becomes challenging for Vicofood to secure the required backing, potentially necessitating a financial payment to import the goods.
Import/export companies like Vicofood often seek bank sponsorships for capital through services such as document discounting, export financing, and loans to support imports Establishing strong relationships with banks is crucial for securing stable foreign currency sources, a challenge that Vicofood has been facing recently.
Banks play a crucial role in international payments, significantly influencing businesses like Vicofood The risks faced by Vicofood can impact the banks' profits and reputation, prompting banks to actively support Vicofood and offer valuable insights during payment operations To mitigate risks and enhance profitability, Vicofood should leverage the resources and expertise of banks in its import/export activities.
Human resources are crucial to an organization's success, making it essential for Vicofood to prioritize investments in developing high-quality talent.
- Professional knowledge of international payment operations combined with professional qualifications about foreign trade is the first and foremost standard of
Vicofood's team is dedicated to ensuring safety in international payment activities The staff in the import-export department must possess a thorough understanding of import and export operations and implement professional processes for international payment methods.
In the import-export business, foreign language skills are essential Vicofood mandates that all employees possess basic English proficiency, at least at a B1 level, to effectively communicate with a diverse clientele from various countries Additionally, the company places a high value on recruiting individuals who are fluent in Chinese, Japanese, and Korean to enhance its global operations.
Understanding laws, including UCP and Incoterms, is essential for Vicofood's staff Continuous upgrading of their knowledge in commercial laws and regulations is crucial Additionally, ethical education in business practices is a key requirement to ensure the quality of personnel involved in the company's import and export activities.
- Computer proficiency: Staffs in Vicofood has to able to use Microsoft office well
5.2.4 Strengthening Vicofood’s business and position
Growing the business operation, expanding the market, increasing the company’s market reputation domestically and internationally are duties which Vicofood’s managers must do in the longer term
Recommendation to banks
Banks possess extensive knowledge about clients and international markets, allowing them to understand foreign partners effectively Leveraging this wealth of information, banks can provide valuable expert advice to Vicofood in the area of international payments.
- Providing information about prestigious, liquidity of foreign banks whose relationships are among banks in Vietnam Providing information about their payment history and prestigious histories
Exporters should be advised on the legal validity of payment documents and the most secure payment methods to minimize risks, reduce costs, and shorten payment periods Upon identifying any document errors, banks promptly inform the company for necessary corrections.
Many exporters lack sufficient experience in managing payments, which is why banks can play a crucial role by providing consultation, answering queries, and offering guidance on implementation This support helps minimize the risks associated with payments that may arise from invalid documentation.
-Giving advice to Vicofood in selecting methods of payment as well as choosing reimbursing banks and preventive methods to avoid commercial risks that may happen
Import-export enterprises are benefiting from specific credit incentives, alongside general businesses, which aim to reduce payment service fees, particularly in the Letter of Credit (L/C) method This payment method, widely utilized by businesses, often incurs substantial fees, prompting the need for cost-effective solutions.
- Supporting Vicofood to open clean documents, which is fit with L/C’s contents and requirements in order to ensure the payment ability of L/C.
Recommendation for the government
The government must implement robust macroeconomic policies to stabilize the foreign currency market and interest rates, while also addressing inflation and reducing import taxes on machinery and equipment These measures are essential for fostering a more stable business environment, especially as the Covid-19 pandemic has significantly impacted import-export companies and other production and business enterprises.
Enhancing market information is crucial for navigating price fluctuations, understanding import needs, and complying with import regulations Access to reliable data on partners and trade opportunities, along with specific import details and warnings about potential business risks, is essential The Ministry of Industry and Trade's website serves as a valuable resource for this information, aiding businesses in making informed decisions in the marketplace.
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