www.train2export.com

by Catherine J. Petersen         11/30/2009  

You and your customer will assess many factors as you negotiate the payment term that will be used for your international transaction. They include, but are not limited to:

• Value of the transaction;
• Your relationship with your customer, new or long-standing;
• The country where the goods are destined;
• The buyer’s country’s rules about how money will be released to you, the seller; and
• Whether the product being shipped is customized, built to specification, or off the shelf.

The global economy is fluid; firms will benefit from regularly examining its own customer base and assessing political, credit and foreign-exchange risks to determine which payment term best suits the situation. There are several sources that provide background information on the buyer’s country and their economy. Options that are available on the internet include:

• National Association of Credit Managers;
• Your local District Export Counsel, one example is at www.exportassistance.com, under Due Diligence Reports;
• Small Business Administration;
• U.S. Export-Import Bank;
• Overseas Private Investment Corporation; and
• U.S. State Department—click on the "A-Z Country Pages", which are managed by the U.S. International Trade Commission.

Frequently used Payment Terms for International Trade

It is important to understand the risk and exposure you will encounter if you agree to a payment term with your customer. In some cases the risks are readily apparent to the parties; in others the risks are obscured by banking protocol in the buyer’s country or laws in the buyer’s country. As a result, it is important to be as explicit as possible in the offer or quotation, the contract and any other payment document.

The following list includes commonly used payment options by exporters and importers around the globe along with synopsis of risks, benefits and costs:

• Open Account with a specified term such as 30 days from international bill of lading date.
  
  • Risk: Non-payment since the buyer has the goods prior to making payment.
  • Benefit: Low-cost transaction for the seller and buyer; the costs are limited to the wire transfer fee and foreign exchange costs.
• Open Account with a specified term such as 30 days from international bill of lading date, backed by a buyer’s bank issued Standby Letter of Credit in lieu of a Bank Guarantee. Bank Guarantees may not be issued in the U.S.
  
  • Risk: Buyer has goods prior to payment since it is open account. Delay of payment due to submission of documentation that supplements the letter of credit only after non-payment by the buyer after a specified waiting period.
  • Benefit: Bank issues the Standby Letter of Credit and it is subject to independent banking rules International Standby Practices (ISP) 98, Publication No. 590 of the International Chamber of Commerce when referenced in the letter of credit.
  • Costs: There will be banking fees deducted from the payment; the buyer will pay interest for the duration of validity of the Standby Letter of Credit.
• Time draft such as ‘30 DAYS FROM INTERNATIONAL BILL OF LADING DATE’; also known as a documentary collection under a time draft.
  
  • Risk: Buyer has goods prior to payment. Reliance on buyer to come forward with payment.
  • Benefit: Buyer promises their bank that they will honor their commitment to make payment prior to receiving documentation that allows them to claim the goods from the international carrier. Bankers handle drafts under a set rules issued by the International Chamber of Commerce known as URC 522 and titled ICC Uniform Rules for Collections.
  • Costs: Generally low; approximately $250 per transaction.
• Sight draft also known as a documentary collection under a sight draft.
  
  • Risk: Reliance on buyer to come forward with payment.
  • Benefit: Buyer pays their bank prior to receiving documentation that allows them to claim the goods from the international carrier. Bankers handle drafts under rules issued by the International Chamber of Commerce known as URC 522 and titled ICC Uniform Rules for Collections.
  • Costs: Generally low; approximately $250 per transaction.
• Documentary Letters of Credit either Unconfirmed or Confirmed.
  
  • Risk: High percentage of documents submitted to the bank in the seller’s and/or buyer’s country do not comply with the requirements of the letter of credit. This exposes the seller to the risk of non-payment.
  • Benefit: Most risks are mitigated through bank promise of payment under the terms and conditions written into the letter of credit. Bankers handle letters of credit under rules issued by the International Chamber of Commerce known as UCP 500, soon to be UCP 600 and titled ICC Uniform Customs and Practice for Documentary Credits (UCP 600).
  • Costs: Dependent on the value of the letter of credit. The banks will generally not negotiate the fees for the seller. In addition, the seller will incur administrative fees that they must pay to the freight forwarder or incur in-house.
• Cash In Advance.
  
  • Risk: Loss of orders to the competition who is willing to accept other forms of payment.
  • Benefit: Payment prior to shipping the order.
  • Costs: Low.
• A combination of two or more of these payment options.

Remember, the payment term that works for another firm may not work for yours; choose the term that lets you sleep at night. Part of your assessment will be a review of the various payment options within your firm and the payment terms the competition is offering your customer base.

Charting Your Options:

To assist you in a review of payment options, here is a table of payment terms associated with conditions that support use of the payment term.

Payment Options

This article was originally published by International Business Training I-B-T.net and Intermart, producers of the number one export software Shipping Solutions.