Show Me the Money
International Methods of
Payment
by Dennis R. Chrisbaum
U.S. Small Business
Administration
Ultimately, any sale is a
gift until payment is
received. Understanding how to
get paid for export
transactions is especially
crucial, since your buyer
could be 10,000 miles away.
There are four basic ways to
get paid internationally. From
the most to the least secure
for the exporter, these
payment methods are:
CASH IN ADVANCE
New exporters who may be
unfamiliar with international
payment options most
frequently request this
method. Their attitude is
usually, "I don't know
you very well, but if you send
me the money, I'll send you
the goods." From a
buyer's point of view,
however, when the money is
sent, it is gone and there is
no guarantee that the goods
will ever be shipped. At that
point, the importer has no
leverage with the seller,
relying totally on the good
faith of the exporter. If the
importer does not know the
exporter well, there will be
no basis for such trust.
Whether the goods are shipped
on time, and to
specifications, will depend
totally on the integrity of
the exporter, so this method
is a big risk to the importer.
As you can imagine, by
quoting such payment terms,
the exporter limits his
international sales potential,
since competitors might be
offering significantly better
terms. Are there any risks
from an exporter's point of
view? One is that "cash
in advance" should only
mean 1) that the exporter will
pull stock out of inventory
and ship it when money is
received, or 2) the exporter
will begin producing the
order, if it is not inventory,
when money is received.
Exporters have been
"burned" when they
have agreed to these payment
terms without having inventory
in stock. They would use their
own working capital to build
an order (perhaps over several
weeks or months), only to have
the order cancelled. The
result is excess inventory, no
money, and creditors knocking
on the door.
A very popular subset of
this method of payment,
especially for small
commercial orders (generally
under $20,000) or direct
consumer sales, is the use of
credit cards. An advantage is
that you can still price your
products, and get paid, in
dollars; the credit card
company will bill your buyer
in his local currency,
converting the amount into
dollars to pay you. Of course,
you must be alert to the
potential fraudulent use of
credit cards. According to a
recent survey, 42 percent of
all fraudulent orders were
international. Obviously,
orders originating in some
countries present greater risk
than others. Several companies
sell fraud-screening software,
which you may want to
investigate on-line.
LETTER OF CREDIT (L/C)
Letters of credit have been
instrumental in facilitating
international trade for
decades, because they replace
the creditworthiness of the
exporter and importer with
that of their respective
banks. The parties might not
know one another, but they
know and trust their own
banks. The exporter knows
that, when his bank confirms a
letter of credit opened
abroad, his bank will pay him
if the specified documents are
in order. The importer opening
the letter of credit has
confidence that his bank will
only make payment when the
required documents are
presented. One of the required
documents usually is a
transportation document saying
that the purchased goods have
been put on board a truck,
ship, or plane. Letters of
credit are thus paid only when
the specified documents have
been examined and are found in
order. That is why they are
called documentary letters of
credit.
 Other
normally required documents
are a packing list, a bill of
lading, an insurance
certificate, and a commercial
invoice, although other
documents such as a
certificate of origin or an
inspection certificate may be
required. One advantage of a
letter of credit is that it
cannot be amended or cancelled
unless all parties agree. In
addition, having a U.S. bank
add its confirmation, meaning
that the U.S. bank agrees to
pay if the documents are in
order, can reduce the risk
under a letter of credit.
Always make sure that your
buyer sends your L/C through
the international banking
system. Banks have a process
called "advising"
letters of credit. This checks
the authenticity of letters of
credit. Occasionally, a letter
of credit will look
letter-perfect but in fact
will be fraudulent. Never ship
a product until your banker
has authenticated your L/C.
The upside to this payment
method is that the buyer is
more comfortable that the
specified goods will be
shipped as required, and the
seller is more confident that
payment will be received as
agreed. The downside is that
this method will tie up either
the buyer's cash or credit
line and that competing firms
might offer more favorable
payment terms.
DOCUMENTARY COLLECTIONS
In this case, the exporter
sends the required documents
(including the bill of lading,
which serves as a title
document) through his bank to
the importer's bank. The
importer must come into the
bank and either pay cash (cash
against documents) or agree to
pay (documents against
acceptance) before the bank
will release the documents so
that the importer can pick up
the goods at customs. Under
documentary collections, the
exporter maintains control of
the title document by using
the banking system. So, if the
importer changes his mind and
never shows up at the bank,
the exporter can sell the
goods to a third party in the
importer's country or bring
the goods back to the United
States.
OPEN ACCOUNT
International open account
terms are similar to domestic
open account terms. The
product is shipped and the
buyer agrees to pay in a set
number of days (for instance,
30, 60, or 90) from the
invoice or shipment date. In
this case, the buyer has the
goods and the exporter has a
promise. If a large
multinational company makes
the promise, it is probably
good. However, if the exporter
does not know the importer
well--and wants to sleep at
night--he can buy credit
insurance on the overseas
accounts receivable. These
policies normally will insure
the accounts receivable 90 to
95 percent against commercial
risk (that the buyer won't
pay) and 95 to 100 percent
against political risk (that
nonpayment will be the result
of some foreign government
action).
Insurance is available
either through private sector
insurance companies or the
U.S. Export-Import Bank. To
insure your accounts
receivable worldwide could
cost less than three-quarters
of 1 percent of the invoiced
amount, depending on the
quality of buyers and country
risk involved. By insuring
overseas accounts receivable,
an exporter might be able
accept orders that normally
would have been turned down
because of the overseas
risk--which would be passed on
to the insurer. Such insurance
would also allow the exporter
to borrow against the insured
accounts receivable since,
from a lender's point of view,
the risk has moved from a
foreign country to a major
insurance company or the U.S.
government.
As an exporter you always
quote price, delivery or ship
date, and a method of payment.
While letters of credit are
used extensively in Asia,
Africa, the Middle East, and
Latin America, especially when
the relationship is new or the
commercial, economic, or
political risks might be
relatively high, they are used
less frequently in Europe. In
Europe, documentary
collections is a more
acceptable method to use in
the early stages of a
relationship, and a request
for a letter of credit from a
reputable buyer might be taken
as an insult. Open account
terms can be used for
well-established customers in
low risk countries, or in
situations where there is a
great deal of competition but
credit insurance is available.
It is very important to
know your customer, and what
terms are commonly used in a
target country, before you
begin negotiating the method
of payment. Being aware of
these options, and when to use
them, could make a big
difference in your
international sales success.
Date Updated: March 27, 2007
|
