Import and Export Payment Methods
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There are several basic Export Payment Methods – Import Payment Methods for products sold abroad. As with domestic sales, a major factor that determines the method of payment is the amount of trust in the buyer’s ability and willingness to pay For sales within our country, if the buyer has good credit, sales are usually made on open account; if not, cash in advance is required. For export sales, these same methods may be used; however, other methods are also often used in international trade. Ranked in order from most secure for the exporter to least secure, the basic methods of payment are
Cash in advance,
Letter of Credit,
Documentary collection or draft,
Open account and
Consignment sales.
Since getting paid in full and on time is of utmost concern to exporters, risk is a major consideration. Many factors make exporting riskier than domestic sales. However, there are also several methods of reducing risks. One of the most important factors in reducing risks is to know what risks exist. For that reason, exporters are advised to consult an interantional banker to determine an acceptable method of payment for each specific transaction.
10.1 Cash in advance :
Cash in advance before shipment may seem to be the most desirable method of all, since the shipper is relieved of collection problems and has immediate use of the money if a wire transfer is used. On the other hand, advance payment creates cash flow problems and increases risks for the buyer, Thus, cash in advance lacks competitiveness; the buyer may refuse to pay until the merchandise is received.
10.2 Letter of Credit:
An Exporter if dealing with an unknown customer at the other end may not have any prior exposure to the credit worthiness of the customer and would normally insist on Confirmed Letter of Credit to be opened by Customer before shipping the goods. In such cases the Exporter may not be extending any credit. Also in case of high value transactions with known customers too; exporters prefer to get paid through Letter of Credit.
While dealing with a customer, the Exporter can check seek a credit worthiness rating from the customer’s bank to be able to ascertain the authenticity and credibility of the Customer. Normally Large Multi Nationals demand such credit worthiness reports as a part of their policy.
10.3 Documentary collection or draft:
A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (Document against Payment-DP) or on a specified date (Document against Acceptance – DA). The collection letter gives instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offer no verification process and limited recourse in the event of non-payment. D/Cs are generally less expensive than LCs.
10.4 Open account:
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. Because of intense competition in export markets, foreign buyers often press exprters for open account terms since the extension of credit by the seller to the buyer is more
common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. When offering open account terms, the exporter can seek extra protection under Export Credit Guaranee Corporation of India (ECGC).
10.5 Consignment sales.
Consignment in international trade is a variation of open account in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of an independent distributor or agent. Consignment helps exporters become more competitive on the basis or better availability and faster delivery of goods. Selling on consignment can also helps exporters reduce the direct costs of storing and managing inventory. The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance should be in place to cover consigned goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment.
10.6 New Payment Risk Diagram
| Least Secure | Less Secure | More Secure | Most Secure | ||
| Exporter | Consignment | Open Account Documentary | Letters of credit | Cash-in- | |
| Collections | Advance | ||||
| Importer | Cash-in- | Letters of | Documentary | Open Account | Consignment |
| Advance | Credit | Collections | |||
