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Export Payment Terms and its nuances might overwhelm a few novice B2B Businesses or traders. Due to the importers sitting across the borders, checking their creditworthiness or financial condition might become tough compared to the businesses operating within the domestic arena.
It becomes eminent to form a reliable and acceptable payment term as it is an integral part of an International sales contract. So how to develop the most appropriate export payment terms for your business? By the end of this article, you will have a clear understanding of all the available options for you to choose from and implement.
What Are the Payment Terms in Export and Import?
There are several payment terms in Export and Import. In a global marketplace, these payment terms define at what stage the payment would be done while determining the risk factors for both the parties. These written agreements act as the basis for any B2B international business and provide security to the enterprises.
An export-import international trade, therefore, demands a firm set of regulations. Setting the negotiations and final payment in advance reduces the chances of unfairness or confusion because of the agreement between them.
Methods of Payment Terms in Export and Import
There are mainly three methods of payment terms. Namely:
Collection of Bills
Letters of Credit L/c
While some methods are more favorable for the buyers (Importers), others are favorable to the suppliers (Exporters). It is up to the two parties to choose a mutually agreed payment term based on the trading history and relationship between them. Let’s go through these three payment terms and expound onto them further.
In this type of method, all the shipping documents are handled directly between the trading partners. It limits the role of banks because of this direct transaction. Both the exporter and the importer can benefit from the two subcategories in this type of transaction depending on what the two parties might agree upon.
Needless to say, it offers a relatively cheap and uncomplicated method of payment for both the parties. Clean payments can be further expounded as:
As the name suggests, payments are made in advance by the importer. Therefore, it becomes the best and the safest mode of transaction for the exporter. The exporter ships the goods only after the receipt of payment from the importer. This process helps the exporter not to worry about keeping track of the payment log afterward.
Depending on the terms of the contract, the advance payment can be complete or partial. Due to the risks involved for the importer in an agreement like this, they are usually reluctant to this type of term of payment.
This payment method is beneficial for the importer. The importer in an open account receives the goods in the first place and then makes the payment. The payment is made after an agreed credit period which could be 30 days, 60 days, 90 days, etc. This time period allows the exporter to produce or transport the goods in the period.
The added burden on the working capital of the exporter because of the initial investment might discourage them to pursue this payment term. A trusted relationship and the goodwill of the importer, therefore, might guide the exporter to choose this payment term.
The role of banks comes into existence in this type of payment term. The exporter trusts the world banks with the handling of the commercial and financial documents related to the trade. The Payment Collection of Bills was published by the International Chamber of Commerce (ICC) under URC522. 90 % of the world’s banks follow this.
It is considered one of the most cost-effective methods of evidencing a transaction for the importers. Following are the two methods of collection of bills.
In this term, the documents under consignment are delivered to the buyer/importer only after collecting payment of goods by the buyer's bank. After the transaction of goods, the seller/exporter can submit the documents and a collecting order to the remitting bank. That bank then sends those documents to the collecting bank along with the instructions.
This is a safe way for both the importer and the exporter due to the world bank involved.
Documents Against Acceptance (D/A) unlike D/P is an arrangement where the exporter instructs the presenting bank to hand over the documents only after the importer has signed and accepted the accompanying bill of exchange. When that happens, the payments are released, again providing a safe or neutral way for both parties involved.
A letter of Credit, also known as Documentary Credit, is a written undertaking by the importer's bank known as the issuing bank on behalf of its customer. The importer promises to effect payment in favor of the exporter up to a stated sum of money, within a prescribed time limit and against stipulated documents. It is published by the International Chamber of Commerce under the provision of Uniform Customs and Practices (UCP) brochure number 500.
Popular three ways in which that could take place are:
A revocable letter of credit can be canceled without the consent of the exporter, whereas an irrevocable letter of credit cannot be canceled without the consent of the exporter.
It is a type of Letter of Credit that demands payment on submitting the required documents. Only after the documents meet the conditions of the letter, the bank pays the beneficiary after reviewing those documents.
In this letter of credit, the seller or exporter acquires the guarantee of payment from a confirming bank (also called the second bank). This reduces the risk of non-payment from the first bank due to the nature of this L/c.
All these methods of export payment terms possess their own set of advantages and disadvantages. A hassle-free way to set the payment term might be a clean payment but be disadvantageous to one part, whereas a Letter of Credit provides more security but is more expensive at the same time. It all boils down to the priorities of both parties in the end and the agreement through which this relationship may prosper financially.
What are DA and DP payment methods?
In Documents Against Payment (D/A), the documents under consignment are delivered to the buyer/importer only after collecting payment of goods by the buyer's bank. Only after the transaction of goods, the seller/exporter can submit the documents and a collecting order to the remitting bank. That bank then sends those documents to the collecting bank along with the collection instructions.
Whereas in Documents Against Acceptance (D/A), an arrangement is made where the exporter instructs the presenting bank to hand over the documents only after the importer has signed and accepted the accompanying bill of exchange. When that happens, the payments are released, again providing a safe or neutral way for both parties involved.
What are LC and TT payment terms?
TT stands for Telex Transfer, Telegraphic Transfer, or Wire Transfer. In this case the transaction is made through electronic means through these mediums. Whereas in LC (Letter of Credit) payment terms, a written undertaking is provided by the importer's bank known as the issuing bank on behalf of its customer.
What are Import LC and Export LC?
The import LC document is legally binding, thereby it cannot be changed unless both the parties agree to sign those changes. Whereas an Export LC is also a legal binding, but the terms are flexible. So it proves to be more beneficial to the exporter.
Who issues export LC?
The issuing bank transmits the LC (Letter of Credit) to the nominated bank, which forwards it to the exporter.
Can export payment be received in INR?
Yes. Indian exporters may receive advance payment against exports from overseas importers in Indian rupees.
What is the export payment process?
The export payment process is the way through which the two parties (Importer and Exporter) agree to set the payment terms for future transactions. This process is usually set to minimize future disputes and disagreements. Therefore, a mutually agreed export payment process is formed to augment any potential financial concerns.
What if export payment is not received?
Based on the terms of payment, legal action can be initiated by the exporter against the faulty importer under the International Trade Dispute Resolution mechanisms.
What is a Letter of Credit and how does it work?
A letter of Credit, also known as Documentary Credit, is a written undertaking by the importer's bank known as the issuing bank on behalf of its customer. The importer promises to effect payment in favor of the exporter up to a stated sum of money, within a prescribed time limit and against stipulated documents.
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