Import/Export Terms—Payment

Import/Export Terms—PaymentWhen starting an import/export business, a mistake or misunderstanding in payment agreements can be costly.  Here are a few payment terms you can use to better understand the payment process

  • Irrevocable L/C (Letter Of Credit)—A letter of credit helps eliminate the financial risks for you, the manufacturer, and the distributor.  A letter of credit is drawn when your distributor confirms the order.  This letter of credit confirms that funds are available from the distributor to cover the quoted costs. With an irrevocable letter of credit you are assured the order will not be cancelled at any time. When the L/C is confirmed by your bank to deliver the goods, the distributor is assured of delivery. the currency exchange is also confirmed at that time, so you don’t have to worry about the fluctuation in currency.

    The bank holds the money until all shipping documentation is presented. The letter of credit states the terms and conditions to make it legal and negotiable into money.  It is usually held for proof of shipment of the goods.  A freight forwarder can help you attain all those documents. When you present the documents to the banker, the letter of credit is turned into liquid assets to then pay the manufacturer and all other invoices from the transaction.

    Working on a promise is not an option!  Not only do you take a gigantic risk, everyone you are involved with is at risk. A letter of credit is the only sure way to transfer these payments. An irrevocable L/C can’t be withdrawn or amended by the opening bank without the agreement of the beneficiary. This kind of L/C is more secure, therefore, it is most often used.

    • Remittance—Three Types
      • Mail Transfer—The buyer will hand over the payment of the goods to the remitting bank which authorizes its branch or correspondent bank in the country of the beneficiary by mail to make the payment to him.  This is less expensive, but takes more time.
      • Telegraphic Transfer—The buyer presents the payment of the goods to the remitting bank which authorizes its branch or correspondent bank in the country of the beneficiary by telegraphic means to make the payment to him. This method costs more than mail, but is quicker.
      • Demand Draft—The buyer goes to the local bank to buy a banker’s bill and then deliver it to the seller or beneficiary by mail. When the seller or beneficiary receives it, he will come to the designated bank for cash. You can also use promissory notes or checks in this way.
    • Documentary Collection
      1. D/P at sight—The seller chooses whether or not to draw a draft on the buyer.   The seller submits the shipping documents with or without the draft, and the documentation will be transferred to the collecting bank.  The bank presents them to the buyer and asks him to make the payment at sight.
      2. D/P  days after sight—The buyer accepts the documentary draft drawn by the seller when presented and makes payment on its maturity. The shipping documents are to be delivered against payment only.
  • Documents Against Acceptance—D/A—The buyer can get the shipping documents from the collecting bank after he has accepted the draft. This is only applicable to time draft. This is convenient for the buyer, but it means much more risk for the seller.  Once he has delivered the shipping documents, he loses title over the goods.  The buyer might refuse to pay after he has accepted the draft and taken the delivery of the goods. The seller can take legal action, but the buyer can claim bankruptcy.  There’s nothing the seller can do but accept the loss. 

Payment terms can be tricky, so it’s important to take the time to learn them.  Knowledge of these terms can help prevent problems in the long run.


Follow Us Facebook Twitter Youtube
Facebook Twitter Youtube