Global Trade – Payment Types

One of the vital factors of setting up of an export business is the resolution of payment procedure between you (the seller) and your buyer. It is common that we see a lack of consensus regarding the payment method between the seller and the buyer.  This has been and will continue to be a serious point in the transaction, which may jeopardize not only your current transaction but also multiple transactions moving forward.

Although most exporters prefer accepting advance payment from the buyer, buyers are not likely to send payment in advance unless they are familiar comfortable with you.  That trust is developed over time as you grow your businesses together.

 Export Financing Options

As an alternative, the exporter may require to utilize one of the diverse procedures that we mention below.

Letter of Credit

The exporter may always use a Letter of Credit. Although this is a common payment method within the international exporting community, there are advantages and disadvantages to this process.  A letter of credit offers a security to both the parties. Upon agreement of the final transaction between the buyer and seller, the former gets in touch with his bank to open a letter of credit. The bank then, holds the release of the payment until the seller complete

s the requirements of the letter of credit and provides proof in writing to the buyers’ Banking representative in the US.

Letters of credit are expensive and cumbersome for both buyer and seller.  It is best used as a buyer and seller are getting to know each other and building rapport and trust.

Offering Credit to the Buyer

The exporter could always opt to offer the buyer terms and an Open Account.  The exporter will send the shipment and adhere to the payment terms agreed upon (at delivery, 15 days from shipping, etc.). Unlike the letter of credit, this system do

es not involve any communication between the banks. This may sound to be a huge risk in for the exporters. However, this may not be such a risky affair, once the exporter trusts his buyer and understands his financial limits and maintains a manageable exposure.

Document against Payment aka Cash Against Docs

This option offers the buyer and seller a hybrid between the Letter of Credit

and an Open account.  Releases of the payment from the buyer’s bank account occur upon the Seller providing the buyer’s UUS banking representative with the required transaction documentation (usually a copy of the commercial invoice, packing list and bill of lading or airway bill).

It is critical that you negotiate payment terms upfront. It is just as important to ensure you live up to your commitment as you are building your rapport and history with your buyer.

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