Credit Terms

Most beginners in the export business may worry about the terms of payment. Because, unlike other domestic business, they are dealing with a buyer who is situated thousands of miles away from across borders. One might not even know the financial condition or credit reliability of the buyer. At the initial stage, the exporter may not have met the buyer, or may not be aware of the specific trade policy of the destination country now would they have any idea about the political status or the expectancy of of natural calamities in that region. Payment terms in any business is a major part of a sales contract. In international business, terms of payment in exports and imports plays a critical role.

The major ways of making payments in export and import are:

  1.  Cash-in-advance: With cash-in-advance payment terms, an exporter can minimize or avoid credit risk because payment is received before the ownership of the goods is transferred. For international sales, credit cards and wire transfers are the most commonly used cash-in-advance options. With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions.
  2. Letter of Credit: Letter of credit (LC) is one of the most secure instruments available for international trades. An LC is a commitment done by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions which are stated in the LC have been met. The buyer establishes credit and pays his or her bank to avail this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain but the exporter is satisfied with the reliability of the buyer’s foreign bank.
  3. Documentary Collections: A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment of the sale. Funds are received from the importer and transferred to the exporter through the banks involved in the 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 collection letter includes instructions that state the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offer no verification process and limited options in the event of non-payment and also D/Cs are generally less expensive than LCs.

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