TERMS OF PAYMENT

Foreign companies can obtain bank references on prospective customers before undertaking business in foreign countries, and to consider whether checks by commercial credit agencies are appropriate. Before agreeing a method of payment (see below) it is best to contact the International Division of your bank. Although there will be companies who manage to secure payment in 60 days or less the period of credit offered by a supplier to a customer tends to be amongst the highest in Europe, anything from 90 to 120 days. The method of payment will need to be agreed when negotiating the contract. It will depend on the degree of commercial trust that exists between the parties involved and whether credit is offered or required by either party. International term of payment including:

• Cash In Advance

Usual Time of Payment : Before shipment

Goods Available to Buyer : After payment

Risk to Seller : None

Risk to Buyer : Complete, Relies on seller to ship exactly the goods expected, as qoted and orderd

Remark : Seller’s goods must be special in one way or another, or special circumstances prevail over normal trade practices (ex: goods manufactured to buyer-only specification)

 

• Letter Of Credit (L/C)

Usual Time of Payment : After shipment is made, documents presented to the bank.

Goods Available to Buyer : After payment

Risk to Seller : Commerical Invoice must match the L/C exactly. Dates must be carefully headed. "Stale" documents are unacceptable for collection.

Risk to Buyer : Assures shipment is made but relies on exporter to ship goods as described in documents. Terms may be negotiated prior to L/C agreement, alleviating buyer's degree of risk.

Remark : Letters of Credit require total accuracy in conforming to terms, conditions, and documentaion. Consult your United Shipping Associate member for determining feasibility of terms and conditions. T he documents requested in a letter of credit such as commercial invoice, transport document such as a bill of lading or Airway bill, insurance document, inspection certificate, certificate of origin

 

• Confirmed Irrevocable Credit 

Usual Time of Payment : After shipment is made, documents presented to the bank.

Goods Available to Buyer : After payment

Risk to Seller : Gives the seller a double assurance of payments. Depends on the terms of the letter of credit

Risk to Buyer : Assures shipment is made but relies on exporter to ship goods as described in documents. Terms may be negotiated prior to L/C agreement, alleviating buyer's degree of risk.

Remark : The inclusion of a second assurance of payment (usually a U.S. Bank) prevents surprises, and adds assurance that issuing bank has been deemed acceptable by confirming bank. Adds cost and an additional requirement to seller.

 

• Unconfirmed Irrevocable Credit

Usual Time of Payment : After shipment is made, documents presented to the bank.

Goods Available to Buyer : After payment

Risk to Seller : Seller has single bank assurance of payment and seller remains dependent on foreign bank. Seller should contact his banker to determine whether the issuing bank has sufficient assests to cover the amount.

Risk to Buyer : Assures shipment is made but relies on exporter to ship goods as described in documents. Terms may be negotiated prior to L/C agreement, alleviating buyer's degree of risk.

Remark : Credit can be changed only by mutual agreement, as stipulated in a sales agreement. Becomes open account with buyer's bank as collection agent. Foreign bank may have problems making payment in sum or timeliness.

 

• Draft

Usual Time of Payment : Remittance time from buyer's bank to seller's bank may still take one week to one month.

Goods Available to Buyer : Before payment, after acceptance

Risk to Seller : Drafts, by design, should contain terms and conditions mutually agreed upon.

Risk to Buyer : Assures shipment but not content. Time of maturity allows for adjustments, if agreed to by seller.

Remark : A draft may be written with virtually any term or condition agreeable to both parties. When determining draft tenor (terms and conditions), consult with your banker and freight forwarder to determine the most desirable means of doing business in a given country.

 

• Sight Draft (with documents against acceptance)

Usual Time of Payment : On presentation of draft to buyer

Goods Available to Buyer : After payment to buyer's bank

Risk to Seller : If draft not honored, goods must be returned or resold. Storage, handling, and return freight expenses may be incurred.

Risk to Buyer : Assures shipment but not content, unless inspection or check-in is allowed before payment.

Remark : A draft can be a collection instrument used to exchange possession and title to goods for payment. Seller is essentially drawing a check against the bank account of the buyer. Buyer's bank must have pre-approval, or seek approval of the buyer prior to honoring the check. Payble upon presentation of documents.

 

• Time Drafts (with documents against acceptance)

Usual Time of Payment : On maturity of the draft

Goods Available to Buyer : Before payment, after acceptance

Risk to Seller : Relies on buyer to honor draft upon presentation.

Risk to Buyer : Assures shipment but not content. Time of maturity allows for adjustments, if agreed to by seller.

Remark : Payable based upon the acceptance of an obligation to pay the seller at a specified time. Although a time draft has more collection leverage than an invoice, it remains only a promissory note, with conditions.

 

• Open Account

Usual Time of Payment : As agreed, usually by invoice

Goods Available to Buyer : Before payment

Risk to Seller : Relies completely on buyer to pay account as agreed

Risk to Buyer : None

Remark : All terms of payment, including extra charges and terms should be mutually understood and agreed upon prior to open account initiation. Companies conducting ongoing business are candidates for open account terms of payment. Seller must measure not only buyer's credit reliability but the country's as well.

IMPORTANT : - When establishing international terms of payment, please consult your banker and your shipper to determine the method most beneficial to you.