PAYMENT TERMS

INTRODUCTION
In export trade,business dealings are carried on between parties who may be separated by thousands of miles. There must exist clear understanding of how and when they will pay the exporter for the goods ordered. It is left to the exporter to indicate the way in which he wants the importer to pay him. The exporter may ask for prompt payment or he may allow credit.

FACTORS DETERMINIG PAYMENT TERMS

FINANCIAL POSITION OF THE EXPORTER CREDIT STANDING OF THE BUYER AMOUNT OF THE CONTRACT NATURE OF PRODUCT ECONOMIC SITUATION IN IMPORTERS COUNTRY IMPORT AND EXCHANGE CONTROLS SIZE OF ORDER CREDIT TERMS OF COMPETITORS PAST BUSINESS LINKS

METHODS OF PAYMENT FOR EXPORTERS

ADVANCE PAYMENTS OPEN ACCOUNT PAYMENT ON SHIPMENT AGAINST CONSIGNMENT DOCUMENTARY BILLS

ADVANCE PAYMENT
The buyer is supposed to make the payment in advance which assures the safety of getting payment. This method of payment is used under following conditions:
POLITICAL INSTABILITY IN BUYERS COUNTRY BUYERS COUNTRY FACES ECONOMIC CRISIS BUYER HAS POOR CREDIT WORTHINESS EXPORTER IS NOT PREPARED TO BEAR CREDIT RISK GOODS ARE MANUFACTURED AS PER THE SPECIFICATION OF FOREIGN BUYERS

The exporter forwards all the shipping documents to the buyer and frees himself of the contract and payment. There is proper understanding between the exporter and the buyer on terms of credit & rate of interest in the outstanding amount. This method of payment is favorable under following condition:
THE EXPORTER IS CONFIDENT THAT THE BUYER WILL HONOUR HIS OBLIGATION. THERE IS A LONG & ESTABLISHED RELATIONSHIP BETWEEN THE EXPORTER & BUYER. THE EXPORTER IS ABSOLUTELY SURE ABOUT THE FINANCIAL POSITION OF THE BUYER. THE EXPORTER IS FUNANCIALLY SOUND TO FINANCE THE OPERATION. THERE SHOULD NOT BE ANY EXCHANGE RESTRICTIONS IN THE IMPORTERS COUNTRY

OPEN ACCOUNT

PAYMENT AGAINST SHIPMENT ON CONSIGNMENT

Consignment sale is possible only when the exporter makes his own establishment abroad or appoints an agent abroad to sell goods on his behalf. The shipment on consignment basis should be made trustworthy agent only because:
CONSEIGNMENT EXPORTS IS FULL OF RISKS. DUE DATE FOR THE PAYMENT CANNOT BE FORESEEN. THE EXPORTER MAY FACE CASH FLOW PROBLEM. PRICE TO BE REALISED DEPENDS ON MARKET CONDITIONS.

DOCUMENTARY BILLS
When relevant documents of the title of the goods are also sent along with foreign bill of exchange it is called documentary bill. Documentary bills are of two types:

DOCUMENTS AGAINST PAYMENT

THE EXPORTER SENDS THE NEGOTIABLE DOCUMENTS TO THE BUYER THROUGH THE BANK.

DOCUMENTS AGAINST ACCEPTANCE

THE IMPORTER CANNOT COLLECT DOCUMENTS UNLESS HE GIVES IN WRITING HIS ACCEPTANCE TO MAKE PAYMENT AS PER THE TERMS OF EXPORT CONTRACT.

LETTER OF CREDIT

A LETTER OF CREDIT IS AN AUTHORISATION ISSUED BY THE OPENING BANK THAT IF THE EXPORTER PRESENTS THE RELEVANT SET OF DOCUMENTS, MAKE THE PAYMENT.

PROCEDURE OF LETTER OF CREDIT

CONTRACT OF SALE.

REQUEST FROM THE IMPORTER

ISSUE OF LETTER OF CREDIT

POSSESSIO N OF LETTER OF CREDIT

SUBMISSION OF DOCUMENTS

SCRUTINY OF DOCUMENTS

REALISATIO N OF PAYMENTS.

DOC UM ENT S TO IMP ORT ER

TYPES OF LETTER OF CREDIT

REVOCABLE L/C CONFIRMED L/C WITH RECOURSE L/C TRANSFERABLE L/C RESTRICTED L/C RED CLAUSE L/C REVOLVING L/C

IRREVOCABLE L/C UNCONFIRMED L/C WITHOUT RECOURSE L/C NON-TRANSFERABLE L/C UNRESTRICTED L/C GREEN CLAUSE L/C BACK TO BACK L/C

MODES OF PAYMENT IN EXPORTERS 1) T.T. : Telegraphic Transfer or cash Advance. It is the safest mode of payment as we receive the payment in advance from our consignee. 2) L/C at Sight: L/C means letter of credit. It is a guarantee, given by the buyer's bank, that they will pay for the goods exported, provided that the exporter can provide a given set of documents in accordance with clauses specified in the L/C and in a timely manner. 3) CAD : Cash Against Documents/Bill of Exchange/DP,: You have to send the documents to the buyer through your bank and they will forward those documents to a bank in the buyer's country, along with instructions on how to collect the money from the buyer.

OTHER MODES OF PAYMENTS

Importer's own cheque The importer (the payer or debtor) may choose to pay the exporter, using a cheque issued by them. Banker's demand draft (D/D) This is a better form of cash payment than an importer's cheque and involves the importer's bank arranging a demand draft which is issued to the importer for him/her to send by post or courier or to deliver personally to the exporter. Mail transfer (M/T) In the case of a mail transfer payment, the importer will request his/her bank to instruct their correspondent bank to pay a given amount. Telgraphic transfer (T/T) This remittance method works the same way as with a mail transfer, except that the message is transmitted by cable or telex instead of airmail.

OTHER MODES OF PAYMENT

SWIFT transfers SWIFT, which stands for Society for Worldwide Interbank Financial Telecommunication, is a computerized system which replaces both the telex and mail for bank to bank transfer. Credit card Credit cards are often used to make payments for smaller amounts. International Money Orders These are similar to postal orders and are pre-printed. For eg: western union

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