Export Payment Terms are a critical component of international trade that determine how exporters and importers will handle the final payment. These terms are subject to negotiation or decision by the two parties.
The risk of recovering invoice amounts is always present, but it is heightened in export instances by the physical separation between the parties and the differences in the legal systems of the two nations.
Different methods of payments are made available to importers and exporters so they can reach agreements with one another and reduce risk. Some ways of payment are better for the buyer, while others are better for the seller. Depending on their trading history and relationship, companies may trade with different export terms.
There are 4 types of payment terms and conditions in export. They are as follows:
1. Open Account
2. Documentary collection
3. Letter of Credit
4. Cash in Advance
When using an open account payment in international trade, the buyer accepts the item that the exporter has sent and then pays the exporter at the conclusion of the specified credit period. The length of the credit period can be set at 30, 60, 90, etc. days.
The completion of tasks like production and delivery must occur between the date of receipt of the purchase order and the date of receipt of payment.
The exporter’s working capital condition is impacted by the time lag inherent in this procedure. However, if the importer is a powerful player with the potential for huge volume in the future, the exporter may decide to adopt this payment option.
An exporter may also consent to an open account payment method if the two parties have a strong working connection or if the sum of money involved is insignificant.
In this payment term, the banks of both party are involved in order to finalize the transaction. While a collecting bank works on behalf of the buyer, the remitting bank speaks for the exporter.
The collecting bank will get the shipment paperwork and a collecting order from the remitting bank along with the collection instructions once the exporter has shipped the items.
Following that, it is given to the purchaser, and after receiving payment, the collecting bank transmits the funds to the remitting bank. The remitting bank then sends the money to the exporter.
Documentary collection may occur “at sight” or after a time laps:
Cash Against Documents – DP
When the buyer must make the full payment at once, this is known as a CAD payment term or DP in export. Prior to the buyer’s bank releasing the documents, this payment is made (collecting bank). Sight drafts or cash against documents are other names for it.
Document Against Acceptance – DA
In an export agreement, the buyer is only compelled to make the payment when a certain amount of time has passed.
In this approach, the customer promises to pay and accepts the time draft. The bank can give the buyer access to the documents after receiving this acceptance.
3.Letter of Credit-LC
This is a well-liked and secure method of payment for international transactions. A letter of credit, or written commitment, is provided to the seller by the buyer’s bank.
It is a guarantee to the exporter that the buyer will pay in accordance with the predetermined schedule and under the predetermined terms and circumstances.
4.Cash in Advance
The exporter ships the goods to the buyer only when they have received payment from them, making this by far the safest and finest method of payment terms in international trade.
The payment may be made in whole or in part, depending on the parameters stipulated. However, since the buyer in this scenario assumes the majority of the risk involved in the transaction, the majority of importers are hesitant to participate in cash-advance agreements.
Export import business is all about negotiation. There are very few businesses, where payment terms could be firm and fixed. International trade companies tend to agree on 30 days as the payment term.
If there are any problems with the deliveries then they can negotiate to give more time, but if there is no problem then they will expect to get paid on time as per the agreement.