Like every other business, finance is a crucial aspect of export management. Exporters prefer to get paid quickly while importers seek to delay the payment as much as possible. With the operating margins always thin for exporters it is imperative that they know payment terms used in international trade to get paid in full and on time and more importantly to choose the ones that are acceptable for you and the seller. Here we will give you the details about 10 payment terms largely used in export.
Consignment – Similar to open account which is said to be a less secure form of payment, consignment mandates payment to an exporter only after the goods shipped are bought by end customers. Which is why it is labeled as the riskiest mode of payment.
Open Account (O/A) – Exporters are encouraged to choose O/A as the preferred mode of payment only if it is a low trading partnership or if they are looking to break into competitive markets. An exporter agreeing to O/A as the mode of payment will have to ship the goods to the buyer before the payment is due. This period could be 30, 60 0r 90 days. This mode of payment works well for a buyer but is risky for an exporter.
Collections – A mode of payment which encompasses both a buyer’s and seller’s bank. The funds are transferred from the buyer’s bank to an exporter’s bank. A title document (bill of lading) is requisite for exporters to avail the payment. Which means instead of cash on delivery, the payment is made when the documents are presented.
Letter of Credit – Letters of credit are issued by a bank on behalf of a buyer. The letter, in essence, is a commitment that the payment will be made if the terms and conditions stated are met. Verification of which requires furnishing of said documents. For an exporter, it is the most secure mode of payment.
Cash in advance – This mode of payment is perhaps the most secure for exporters across the globe. As the payment is received before the goods are dispatched to the buyer, the exporter does not have to deal with credit risk or risk of non-payment. Currently used modes are wire transfers and credit cards. With the payment being made upfront, exporters scarce have to avail short term loans from banks.