The method of payment most widely used in unrelated transactions is a "irrevocable letter of credit".
The bank, on behalf of the applicant, issues an irrevocable letter of credit to the beneficiary named in the letter of credit, to pay the beneficiary upon production of the shipping documents as specified In the letter of credit ,such as the Bill of Lading, invoices, packing list or insurance certificate.
To choose the best method of payment for your particular cargo and needs, we recommend you contact the International Department of your Bank
With a globalised economy, and a very competitive international market for commodities, exporters are faced with difficult choices. From a sales and marketing perspective, building favourable credit terms into export contracts can be a means toward obtaining contracts, but can ultimately cause worse problems in terms of cash flow. So how can exporters collect payment while still remaining competitive, and insulate themselves from too great a risk? While collecting payment can be difficult in one's own economy, it can be even more difficult than you would think to collect it from an overseas supplier.
In this article we cover these areas concerning methods of payment. Besides the most frequently used methods, such as Letter of credit, documentary credit and telegraphic transfers. Their is an option that has been around for hundreds of years, that many don't consider - Factoring.
The viable financing alternative: Factoring as the global economy has become increasingly competitive, companies are finding that they must be more flexible with customers to maintain and grow sales. Being able to offer international customers better financing terms is now an important part of any sales package. Since payment from companies in other countries involves elements of uncertainty that are unlike those faced with domestic companies, credit risk becomes more of an obstacle. Selling on open account, which may be best from a marketing and sales standpoint, is fraught with danger. In particular, you may not be able to discover or understand the customer's financial situation and the economic situation of the country in which the customer is located. Also, collecting from foreign accounts is every bit as difficult as you imagine it to be. Cash-in-advance terms are more often placing you at a competitive disadvantage, as open account terms with extended dating are becoming more common despite the dangers.
Other challenges emerge as customers prefer to trade in local currencies. In addition, most domestic banks will not provide the necessary financing on export receivables. This remains a critical issue as these receivables are now utilized as a financing tool in international trade programs.
However, there is an attractive alternative: international factoring. Many exporters have added factoring companies to their list of financial partners in an attempt to incorporate international sales and financing into their objectives.
International factoring may be defined as the sale of assignments of short-term (generally 120 days or less) accounts receivable arising from an international sale of goods or services. There are four parties involved in a transaction: the exporter (seller), the Australian factor (export factor), the foreign factor (import factor) and the customer (buyer). Transactions are somewhat more complex than traditional domestic factoring since there are a number of parties, depending on how many countries there are in which the seller conducts business.
Although international factoring has become more visible in recent years, it is not new. Factoring has been used in one form or another since the fifteenth century when merchandise-such as fish, fur and timber-was exported to England with agents from London making loans and advances to these sellers to help provide working capital.
The nineteenth century was a period of resurgence for factoring, but it was centred more in the US rather than Europe. Beginning in the 1970s, a number of countries began enacting legislation to open the doors to opportunity for cross-border trade activities, and once again the factoring industry was revived as an alternative financing tool. In 1995, $23 billion in international trade was covered by factors, up 17 percent from a year earlier.
A Worldwide Factoring Network
The international factoring business involves networks similar to the use of correspondents in the banking industry. Factors Chain International is the largest of these global networks of factoring organizations. About half the worldwide factoring transactions are through the member companies.
Global networks enable the export factor to give the seller a working financial partner to engage in factoring in another country. The member companies in each country speak the local language, keep current on who is creditworthy, and are ready to act with the export factor as the seller's overseas financial representative. This means that the seller can do business abroad as if it were next door to the customer.
The export factor will work directly with the import factor to represent the seller. Under the supervision of the export factor, the import factor will manage the seller's collections and cover the credit risk.
There are basically three elements of service offered by international factoring companies:
Managing the receivable, where an accounts receivable manager handles collections and provides reporting and bookkeeping services. Typically, the seller "assigns" orders to the factor and the buyer pays the import factor. The export factor guarantees the payment for the order (minus charge-backs, defects, and other things that may go wrong that are beyond the factor's control).
Furnishing credit protection on the receivable and establishing credit lines.
Usually, if the order is not approved for factoring, the seller can still sell to the buyer, but collection is no longer guaranteed by the export factor. For approved orders, the factor collects the payment for the order and then pays the seller, minus the factor's fees, which can include an annual fee plus a commission on each sale.
Lending against receivables. Interest rates vary and the most common loan is no greater than 90% of the value of the receivables. The seller must usually have a minimum of working capital and other qualifying criteria.
How It Works
The seller will sign a factoring agreement with the Australian factor (export factor). Under this agreement, the seller's accounts receivable are assigned to the Australian factor and the seller is covered against credit losses, up to 100 percent of the approved credit. The export factor selects an appropriate import factor to act on the seller's behalf overseas with the export factor's supervision. In the meantime, the import factor overseas investigates the credit standing of any local customer to whom the seller wishes to sell goods.
When approved, credit lines are established so the seller's foreign customer can place orders for goods on open account trading terms. Once authorized sales take place, the seller becomes eligible for funding. The import factor handles the local collection and payment of the accounts receivable.
During all stages of the transaction, records are kept for the seller and reports are made to give the seller important, timely information on such details as delayed deliveries, the wrong merchandise sent to the wrong place, or any other discrepancy causing delays in payment.
International factoring is coming of age among exporters and there are enormous opportunities to capitalize on the economic changes. This alternative financial tool allows the exporter to compete and increase global sales without increasing global risk.
Other more usual methods of payment available to trading companies are outlined below:
Export and Import Letters of Credit - sight and term
Letters of credit are one of the methods of payment that may be used to settle payment for sale of goods between exporters and importers. Banks issue import letters of credit for their customers, and in doing so, provides a definite commitment to pay the beneficiary (exporter), providing all terms and conditions of the letter of credit have been strictly adhered to. There are various types of letters of credit such as: ·Irrevocable, Revocable ,Sight or Term (documentary) ,Confirmed, Standby Transferable ,Back to Back, Red Clause .Revolving Exporters may request a letter of credit, when they are unsure of the importer's ability to pay. Under a letter of credit, the issuing banks creditworthiness is substituted for that of the importer and this security for the exporter is paramount. Although it is important to note that a L/C does not replace the need for a clear and concise contract of sale. Importers may request letter of credit payment terms when they need goods by a certain date or they require specific documentation for importation.
Documentary Collections (including Bills of Exchange) can be an another option to be considered when negotiating a contract of sale. Collections can be either sight or term, also depending on contract of sale terms. Collections offer a compromise between letters of credit (which can be expensive), pre-payment (high risk to the importer) and open account (high risk to the exporter). Documents and bills of exchange (if applicable) are prepared by the exporter and presented to the exporter's Bank (remitting Bank) with instructions on how to handle the collection. The exporter's Bank sends the documentation to a Bank in the country of the importer (usually the importer's Bank, known as the collecting/presenting Bank) with instructions for presentation to the importer and collection of payment. If the collection is at sight, the importer must pay the amount of the collection, before they receive the documents that are needed to clear the goods. If the collection is at a previously negotiated agreed term, the importer is usually required to accept a bill of exchange before documents are released. Collections are sent and received with various instructions and each collection will be treated individually, depending on the instructions.
Methods of Payment
There are a range of payment options available for your Import and Export transactions. These include Prepayment by Telegraphic transfer or International cheque, Documentary Letter of Credit, Documentary Sight Collection, Documentary term Collection and payment after arrival of goods. These differing payment options provide importers and exporters flexibility in terms of payment. Considerations such as cash flow, risk, relationship and history with the overseas supplier/customer all affect which payment option is suitable.
Prepayment is where the consignment is paid for either by telegraphic transfer or international cheque prior to shipment. It provides the most protection and is the most ideal for the shipper. Documentary Letter of Credit - issued by the buyer's bank guaranteeing payment, providing all terms and conditions in the letter of credit are met.
Documentary Sight Collection Shipping Documents are forwarded to the buyer's bank for delivery to the buyer only after payment is made.
Documentary term collection - shipping document are forwarded to the buyers bank for delivery to the buyer only after the buyer agrees to pay in full on a future fixed date.
Payment after arrival of goods Also known as open account trading or shipping goods on consignment payment is made by telegraphic transfer or international cheque only after delivery or on-sale of goods.
We recommended you spend some time to examine the methods you use in payment and in collecting payment. The right choice can mean the difference between success and failure with your CASH FLOW