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Cash in Advance Ca: 6 Types of Payment Terms For Exporters
Cash in Advance Ca: 6 Types of Payment Terms For Exporters
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OPEN ACCOUNT
Under open account payment terms, the supplier ships the goods to the buyer without receiving
upfront payments and collects the due amounts at a later date (15, 30, 60, 90 days or more).
Discounts on the invoice face value may be granted, on the sale invoice, for anticipated payments.
This type of payment, which is quite common, has an opposite nature to “cash in advance”, as it is
very favorable for the buyer and unfavorable for the seller (who bears the full payment risks).
Payments in open account are generally accepted by suppliers with low negotiation power or by
suppliers that have long-lasting relationships with the buyer.
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Credit Insurance
12/10/22, 3:01 AM 6 Types of Payment Terms for Exporters - Projectmaterials
Some sellers subscribe credit insurance contracts believing that they will protect their “open
account” sales.
A common trait of these types of contracts, which are generally expensive, is that they actually cover
the creditor in case of bankruptcy of the debtor but they do not cover the seller when the buyer
rejects payment for any due or undue cause.
When a buyer disputes a delivery, the insured seller has to turn to the Law, and not to the credit
insurance company, to get the payment.
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LETTER OF CREDIT
A Letter of Credit, simply defined, is a written instrument issued by a bank at the request of its
customer, the Importer (Buyer), whereby the bank promises to pay the Exporter (Beneficiary) for
goods or services, provided that the Exporter presents all documents called for, exactly as stipulated
in the Letter of Credit, and meet all other terms and conditions set out in the letter of Credit.
A Letter of Credit is also commonly referred to as a Documentary Credit.
Letters of credit are used between trade partners that do not know themselves well, are located in
remote locations and do not accept the payment risks of other payment terms as open account,
bank transfer, and, cash against documents.
The terms “Letters of Credit” /or L/C) and “Documentary Credit” (D/C) have the same exact meaning.
The first is more common in USA and Asia, whereas the latter is common terminology in Europe.
HOW TO ISSUE AN LC
Before issuing an LC, the importer shall have approved credit limits sanctioned by the issuing bank.
Moreover, imports and exports transactions that involve foreign currencies are subject to foreign
exchange regulations and other International rules like UCPDC 600, URR etc.
Generally, the issuing bank requires the importer to submit an LC Application form to issue a Letter of
Credit.
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After receiving the application, the bank issues a draft LC that the importer and exporter can review
and, in case, amend. As the LC is agreed between the parties, the issuing bank submits the LC to the
exporter advising bank, who in turn informs the seller. As an LC is received, the seller can start the
manufacturing or delivery operations with strong payment security.
Financial standby letters of credit ensure financial contractual obligations are fulfilled.
Most SLOCs are financial.
Financial SLOCs are often required when performing an international trade or other large
purchase contracts under which other forms of payment protections (such as litigation in
the event of non-payment) can be difficult to obtain.
TRANSFERABLE LETTER OF CREDIT
A transferable letter of credit is a special transferable form of a documentary letter of credit opened
for the benefit of the intermediate seller (the first beneficiary).
The transferable form allows the intermediate seller to apply to the nominated bank with a request of
transferring the letter of credit in whole or in part to the supplier (the second beneficiary).
In case the intermediate seller purchases products from multiple suppliers, it has the right to instruct
the nominated bank to transfer the letter of credit by parts to each of the suppliers.
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BENEFITS OF CONFIRMED LC
The exporter may be interested in adding confirmation to the letter of credit in the following cases:
when the creditworthiness of the issuing bank is uncertain
when selling to politically unstable countries
to prevent the risk of default of the issuing bank
to execute the LC faster
Banks confirm LCs at a cost that is expressed as an interest rate or a fixed fee (or a combination of
both). Generally, the cost is an interest rate ratio (example Libor) plus a spread (confirmation fee).
The higher the risk for the confirming bank, the higher the cost.
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MX
The key conditions to put in a place a back to back schema are:
Openthe trader has a successful trading history with his bank
Your XM
the trader is the first beneficiary of the “export LC” (the LC issued by the end user)
the export LC has been issued by a prime bank, and it can be confirmed by the advising bank of
Account
the trader (first beneficiary)
Now trader’s supplier(s) shall accept payment by letter of credit
import and export LC’s show same terms and conditions, except for the price of the goods
XM
(nature of goods, delivery place, and terms, pay location, documents, etc)
Not all banks accept a back to back schema, as it involves some degree of risk for the bank itself.
However, when banks can ensure a consequential cash in and cash out, and know the terms of the
transaction well, a back to back LC may be arranged.
BENEFITS OF BACK TO BACK LETTER OF CREDIT
The trader may finance the transaction without impacting own funds or credit lines
buyer may not know the identity of the seller, and the seller may not know the identity of the
end buyer
The trader may expand the business beyond its financial capacity
TRANSFERABLE VS BACK TO BACK LETTER OF CREDIT
Sign up
Differently from “transferrable” LCs, which require the end user to approve the transfer of the credit
from the original beneficiary to a new beneficiary (condition that is seldom accepted, as risky), a
back to back LC does not require such approval and is a private arrangement between the
beneficiary
Stainless of the “main LC” /”export LC” and its bank.
TheSteel
end user and the manufacturer of the goods may be totally unaware of the fact that a back to
back arrangement has been put in place to execute the transaction.
TUbe
Complete
Standard Size
For Boilers &
Heat
Exchangers
As Per SWG,
BWG, AWG
Tables
EZ Steel
Industrial Co.
Open
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MX
Open
Your XM
Account
Now
XM
Sign up
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US
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8 Responses
My customer want to buy mask in L/C at sight and my seller just accept T/T. can you solve this problem?
the deal amount is $2 million.
Reply
Reply
(http://www.mkmedicaltextile.com) says:
Hello,
Reply
(http://www.mkmedicaltextile.com) says:
Hello,
Reply
https://blog.projectmaterials.com/project-procurement/contract-payment-terms-options/ 10/14
12/10/22, 3:01 AM 6 Types of Payment Terms for Exporters - Projectmaterials
Cash in advance is one of the most secure payment terms for sellers, and the least secure for buyers. But cash
delivery is the best way to achieve trust from the customer and this is the way to develop the brand identity.
Reply
Hi
I have now my buyers place some orders to me and they want handle for them these orders.
The orders coming round 3-5 M $USD from CHINESE TURKISH suppliers.
I am looking someone who can offer me the instrument for payment terms open to suppliers L/C.
Reply
I read this post your post is so nice and very informative post thanks for sharing this post.
Reply
Reply
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