What Are the Different Types of Export Payment Terms?
For those new to the export business, it can be seen as adventurous and risky, and it can be. However, our government has implemented measures and processes to simplify the process. There are rules to accept international payments, FEMA for handling foreign exchange, and regulations around inward remittance like FIRC or UTR numbers. Many of these factors are tracked from when export payment terms are decided.
Many payment terms must be considered based on the type of transaction, whether a letter of credit is issued or the type of export invoice.
What are the different export payment terms available to exporters?
Exporters value the export payment terms highly, especially if transacting with a relatively new buyer. Attractive payment terms will reduce risk, help with financing options, and ensure better cash flow.
Here are some of the standard export payment terms to consider
Advance payment
As the export payment term indicates, the importer pays for the goods before they are shipped. This payment can be either full or partial. By doing this, the risk involved in the transaction moves to the importer rather than the exporter.
How does advance payment work?
Once the deal has been finalized, the importer will pay the exporter either partially or in full, even before the goods are shipped. The exporter benefits from this because they are assured of the payment, do not need to look for financing options, and can complete the order without interruption.
The importer will bear the risk that the exporter may not send the goods on time, meet the quality standards, or completely fail to deliver them. The most commonly used methods to make advance payments are bank wire transfers, credit cards, or escrow accounts.
Letter of credit
Under this export payment method, the importer’s bank will guarantee payment to the exporter once the conditions in the letter of credit (LC) are fulfilled. These conditions could involve timely delivery of goods per quality specifications, submission of shipping documents, etc.
How does LC work?
Once the importer and exporter agree on the transaction terms, the importer or buyer’s bank will issue a letter of credit to the seller. Once the exporter ships the goods, they will present the documents to the bank, which will release the payment.
The risk factor is lowered for both the exporter and the importer as the bank guarantees the payment. The risk is reduced for the importer because the LC requires the goods to be delivered on time with the proper specifications. Both parties can choose from different types of letter of credit according to their requirements.
Documentary collection
Under this method, the exporter ships the goods and sends the title documents to their bank, which transmits them to the importer’s bank. The importer must make the payment or accept the obligation to pay before the documents are released to them.
How does documentary collection work?
Once the exporter has completed the shipping process, the exporter’s bank will share the shipping documents with the importer’s bank. They will be instructed to release the documents once the payment obligations are met.
In this case, the risk is moderate on both sides. If the importer refuses to pay for the goods or accept them, it could pose a risk to the exporter. The importer will face the risk of not getting the goods if they cannot meet the payment obligation. The documents against payment happen when the importer pays in full. The documents against acceptance are a situation where the importer accepts the obligation to pay at a future date and is allowed to take possession of the goods.
Open account
As per this arrangement, the exporter will ship the goods and invoice the importer for the amount due. The importer will then agree to make the payment later, which could range from a month to three months.
How does an open account work?
The exporter and importer agree on the goods' shipment, the invoice amount, and the payment terms (after 30, 60, or 90 days). In this case, the risk to the exporter is greater as they face the risk of non-payment, while the risk to the importer is minimal as they have received the goods before making the payment.
This arrangement works best when both parties have been doing business with each other for a long time or when an exporter wants to enter a competitive market by offering attractive terms.
Consignment
Under this export payment term, the exporter will sell and ship the goods to the importer but will remain the owner until the importer sells them to the end consumer. The importer will pay only for the goods sold, not the rest.
How does the consignment export payment term work?
The exporter agrees to ship the goods to the importer on a consignment basis. The importer will collect the goods, start selling them to the end customer, and pay the exporter to the extent of the sales.
In this case, the risk to the exporter is high as the payment being made depends on the extent of sales at the importer’s end. And if the goods do not sell, the exporter is not paid. The importer is at low risk as they are not obligated to pay if the goods are not sold. This type of export payment terms is agreed upon when there is complete trust between the importer and exporter and the goods are in great demand in the country you are exporting to.
How do you select the correct export payment terms for your export business?
You must consider several factors when making this decision, such as your business tolerance for risk, your trust or rapport with the importer, the cost of producing goods, and the market conditions.
Take a calculated risk with your export payment terms in such conditions:
1. You are comfortable with the amount required for the consignment
2. You want to penetrate a competitive market by offering good payment terms to the buyer
3. Your financial position and capital outlay are covered with other transactions, and you want to take a slight chance
4. You and the importer have been trading for a while, and you are confident of their ability and willingness to pay
5. You can avail of government benefits for this export transaction to cover a large part of the risk
In conclusion, no matter what export payment terms you choose, ensure that you streamline the process of inward remittance with the right platform. Wondering how to select the right platform for your business? Wonder no more, contact us to learn how LeRemitt can help!
