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Receiving prompt payment for your exported goods is key to maintaining positive cash flow for your business. Your international buyer, on the other hand, is more interested in receiving the right goods on time and delaying payment for as long as possible. To keep both parties satisfied, the terms of payment should be agreed in advance.
The main methods of payment for international transactions include:
- Payment in advance
- Letters of credit - confirmed and unconfirmed
- Documentary collections - against payment/against acceptance
- Consignment
- Open account
Payment in advance
This is the least risky payment method for exporters, but can sometimes prove too expensive and risky for international buyers. Be wary of insisting on payment in advance - if your competitors' payments terms are more attractive your potential buyer may go elsewhere. If, however, the products to be exported require specialised, lengthy or capital-intensive manufacturing then it is reasonable to ask for (at least) partial payment in advance.Letters of credit
Letters of credit, issued by banks on behalf of buyers, are a popular and internationally recognised method of payment. They represent the bank's assurance to pay the exporter, provided the specified conditions are met, and act as security for both parties.Once the letter of credit has been drawn up, the importer instructs the bank to transfer payment to the exporter's bank. The exporter then dispatches the goods, and passes the invoice and shipping documents to the bank in order to receive payment. However note that unless the letter of credit is confirmed in UK, the exporter may have to wait some days and possibly weeks to receive payment from overseas which can have serious implications on cash flow.
The letter of credit ensures that:
- Payment to the exporter will only be made after the terms of the agreement have been met
- The documents, which have been reviewed by the bank's experienced staff, are strictly in accordance with the letter of credit
- The exporter is assured of the importer's ability to pay and, as a result, a better price and more advantageous terms of payment may be offered
Documentary collection
A documentary collection involves the exporter issuing a bill of exchange to the importer. The buyer pays the agreed amount either on sight or on a specified date in the future in accordance with the terms of the bill of exchange. The exporter's bank, acting as an intermediary, transfers ownership of the goods to the importer by passing documents of title, usually the bill of lading.This method of payment is riskier than using a letter of credit because a bank does not guarantee the bill of exchange. Also, if the buyer defaults on payment the exporter may have to pursue collection through the courts.
Consignment
When goods are exported subject to consignment, the exporter only receives payment on completed sales. Any unsold items may be returned to the exporter, usually at their expense.Clearly this method of payment poses a high risk to the exporter, as there is generally no way of predicting when (if ever) the goods will be sold and thus receiving payment.
Open account
Offering importers an open account means that the goods will be manufactured and delivered upon receipt of a purchase order. The exporter then normally raises an invoice to the buyer before or at the time goods are despatched with payment terms set at a number of days (e.g. 14, 30 or 60 days). If the invoice isn't available at the time the goods are despatched customs clearance may be a problem.This method of payment is the most attractive to importers, but can be risky for exporters. Consider offering an open account if you've developed a relationship with the buyer, they are creditworthy and the export country is politically and economically stable. You must have absolute trust in that you will be paid.
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