This information is a brief summary of the ways in which you can get paid for the goods or services that you export. You should contact your bank for comprehensive advice about payment options and the relative advantages of each option for your particular situation.
Getting paid is a critical part of any export transaction – and one which you have to get right.
There are a number of payment methods used in international exporting. The best payment option for you at any particular time will depend on a number of factors:
- How much can you trust your buyer? How well do you know the company? Have you established a relationship of trust, or is this the first transaction?
- How much risk are you prepared to take?
- How much risk is your buyer prepared to take?
- How big is the transaction?
- And, can you bargain for more favourable terms with this buyer?
Methods of payment
The following methods for export payment are listed in order - from the method with the least risk first to the method with the most risk last.
Pre-Payment or Upfront Payment
Known as Pre-Payment, Upfront Payment, or Cash Sale, the buyer pays cash in advance of a shipment. This method of payment is unusual in international trade but has become common in Internet transactions.
While Pre-Payment greatly limits your risks as the exporter, it has the opposite effect on the buyer. By paying cash in advance, the buyer has to trust that you will deliver quality products on time.
This is an excellent option (for the seller) if you dealing with a new customer, but you will probably find that many buyers are not happy to use this payment method, especially if they don’t know you well.
Letters of Credit
In a Letter of Credit, the importer’s bank issues a document stating that they will pay the exporter when the terms of the Letter of Credit are fulfilled. Terms that could be specified include quantity, description and documentation. The onus is on the exporter to ensure that the documents and quantities shipped are correct; otherwise the exporter risks non-payment. A Letter of Credit also locks the importer in to the contract and ensures that they cannot renege or pull out of the deal.
Letters of Credit, a form of Documentary Collection, have been a cornerstone of international trade since the early 1900s.
Letters of Credit offer security, particularly when you are dealing with new customers and have not had to time to build a relationship of trust.
With a Letter of Credit you know that you will be paid, and don’t have to worry about your buyer’s willingness or ability to pay because a Letter of Credit guarantees payment for an export against receipt of specified documents.
As the exporter, you must make sure that you get the Letter of Credit before you start the production phase of the transaction: you definitely should have the Letter of Credit in place before you ship any products.
- The Letter of Credit must reflect the agreement you made with your buyer.
- You must be sure that you can adhere to all the requirements listed in the agreement such as latest shipping date and mode of transport, and that all documentation requested can be provided.
- Wording of the documentation is important, and all wording, descriptions, weights, etc., on documents must match.
- Once your products are shipped, lodge all the necessary documents with your bank. The bank will check that the documents meet the requirements in your Letter of Credit. Your documents must be in strict accordance with the Letter of Credit, otherwise your bank will not be able to claim payment from the issuing bank.
- Your bank will credit your account when they receive the funds from overseas. There may a slight time lag because the documents need to be checked by your bank, then sent via courier to the issuing bank overseas, and then to the customer. This means you will need to get the documents to your bank quickly, as soon as the shipping documents are available, otherwise your customer will incur demurrage charges at the port or airport for delays in picking up the goods.
- You may want to have your Letter of Credit confirmed or guaranteed by an Australian bank or take out export credit insurance. The cost of confirming a Letter of Credit depends on the risk associated with the market and bank overseas.
- If an Australian bank does not confirm your Letter of Credit and you do not have export credit insurance, you could run the risk of a foreign bank not performing and making payment to you.
When you use the Documentary Collection payment method, you entrust the handling of your trade documents to your bank:
- You, as exporter, produce and ship the goods, passing all the necessary documents to your bank along with a 'Draft' or 'Bill of Exchange' drawn on your buyer.
- Your bank passes the documents on to their agent bank in the buyer's country.
- If the Draft is drawn 'At Sight' or 'On Demand', the buyer’s bank releases the documents – and therefore title to the goods – once the buyer makes payment.
- If the draft is drawn to mature at some future time, such as '60 days After Sight', the buyer will accept the bill of exchange agreeing to make the payment at an agreed, future date.
Documentary Collections are governed by International Chamber of Commerce rules. There are two main types:
- Documents against payment using a sight draft
- Documents against acceptance using a term draft.
Documents against acceptance’ is considered riskier than ‘Documents against payment’ because it relies on the customer making payment after the agreed time.
Credit terms – also known as Open Account
Your customers may ask you to offer credit terms or you may find that you need to match your competitors in this way.
The demand for your product, your price and how badly you need to do the business will all affect what terms you decide to offer. An Open Account, with an agreed payment period, is increasingly required by buyers.
However, extending credit terms will have a real cost impact on your business because it impacts cash flow, so it is important to estimate the cost of the time it takes to receive payment at the end of the credit period and to build this cost into your price.
With Open Account, you expect payment after you have sent goods to your buyer along with an invoice and other necessary documents such as a Bill of Lading.
This method of payment is similar to domestic credit terms where you place trust in the buyer to remit funds within a specified time.
Open Account is the most inexpensive payment method and is commonly used in intra-company trading, or where the exporter and customer know each other well and wish to cut the cost of having Letters of Credit or Bills of Exchange.
The Open Account option is often requested by buyers, particularly in the United States, but it should only ever be considered where you know a lot about the buyer and have absolute confidence in the integrity of the people involved.
The risk with Open Account is that the buyer can receive your goods and then not pay you, leaving you totally exposed to buyer credit risk, as well as possible country and currency risk.
Export Credit Insurance can help here, and may protect you from non-payment. Well-known names include Atradius and QBE Trade Credit. Export credit insurance needs to be arranged prior to shipping and can generally not be taken out once your customer has a track record of not paying or paying late.
Go to: www.exportfinance.gov.au for a full list of export credit insurance providers and their contact details.
Undertake your own due diligence on buyers
Part of the due diligence you undertake before doing business with a new customer should include credit checks, especially if you are considering offering credit terms. You can hire independent service providers such as the DMS Group, Dun & Bradstreet, CI Australia and Coface Australia to carry out background checks on any company you are proposing to do business with.