Payment Terms – International Trade

Presented By : Altamash AhmadPGDM 2014-2016

Introduction• In today’s global marketplace and win sales against foreign competitors,

exporters must offer their customers attractive sales terms supported by appropriate payment methods. Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer.

• For exporters, any sale is a gift until payment is received.

• For importers, any payment is a donation until the goods are received.

• Therefore, importers want to receive the goods as soon as possible but to delay payment as long as possible, preferably until after the goods are resold to generate enough income to pay the exporter.

Presentation Outline

• Cash - in - Advance

• Letters of Credit (L/C)

• Documentary Collections

• Open Account

Cash - In - Advance

• Buyer pays before shipment.

• Used in new relationship.

• Transactions are small and buyer has no choice.

• Maximum security to sellers.

• No guarantee that goods are shipped.

Letters of Credit• What is L/C?

– A document issued by a bank stating its commitment to pay someone (seller or exporter) a stated amount provided the seller or exporter meets specific terms and conditions.

• Also called the documentary letters of credit.

• Most common payment method in international trade.

• Also protects the buyer because no payment obligation arises until the goods have been shipped or delivered as promised.

Documentary Collections• A documentary collection (D/C) is a transaction whereby the exporter

entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment.

• Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents.

• D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The draft gives instructions that specify the documents required for the transfer of title to the goods.

• Drafts are generally less expensive than LCs.

Seller Buyer

Seller’s Bank Buyer’s Bank

Documents

$

Documents Documents$ $

Documentary Collection

Two types of DC

• Documents against Payment (D/P) Buyer may only receives the title and other documents after paying for the goods.

• Documents against Acceptance (D/A) The buyer may receive the title and other documents after signing a time draft promising to pay at a later date.

Documentary Collection - D/P Time of Payment

On presentation of sight draft by a bank to buyer Goods Available to Buyer– After payment

Risks to Seller– Buyer’s non-acceptance of shipment– Payment delays due to unavailability of foreign

exchange in buyer’s country– Payment blocked due to political actions in

buyer’s country

Documentary Collections - D/A Time of Payment

At maturity of accepted draft Goods Available to Buyer

Before payment Risks to Seller– Buyer’s default on payment obligation– Delays in availability of foreign exchange and

transferring of funds from buyer’s country– Payment blocked due to political events in

buyer’s country

Open Account

• Time of Payment– As agreed; i.e. 30 days

• Goods Available to Buyer– Before Payment

• Risks to Seller– Buyer defaults on payment obligation – Delays in availability of foreign exchange and

transferring of funds from buyer’s country

Open Account

• When Appropriate – Seller has absolute trust that buyer will accept

shipment and pay at agreed time.– Seller is confident that importing country will not

impose regulations deferring or blocking transfer of payment.

• Exporter can offer competitive open account terms while substantially mitigating the risk of non-payment by using of one or more of the appropriate trade finance techniques, such as export credit insurance(ECGC).

Payment Risk

Thank You !