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Payment on International Transactions
Whether importing, exporting or entering into a distribution agreement,
a key provision is the payment terms provision. Various arrangements will
allow you to reduce the risk of non-payment, of late payment; or if making
payment, to make payment less burdensome and risky. The important point
is that you be sure consciously to address this consideration in every
transaction.
Normally, a business will use different arrangements in different markets,
regions, countries, or aspects of the same transaction. Types of financial
arrangements are:
Open Account: goods are delivered without guarantee of payment
to a buyer with a history of successful dealings. It may be a basic open
account or factoring using open account. Factoring is a form of transferring
the accounts receivable to a factor who collects on them.
Consignment Sales: this offers some protection for the seller,
but only a limited amount in the international context.
Documentary Collection: Possession and title pass to the buyer
(through a bill of lading, waybill, commercial invoice, insurance certificate,
certificate of origin and the like) as title is passed; simultaneously,
a payment document is given to the seller (bill of exchange or sight draft
or time draft). The seller, however, is not obligated to accept the goods
and the seller has no recourse against the bank for payment so this method
has disadvantages.
Letters of Credit: The buyer's bank issues a letter promising to
pay the seller upon demand or upon delivery of documents showing that
an underlying commercial transaction has been completed. There many forms
of letters of credit. They can be as rigid or as flexible as the parties
deem fit. The seller will want few requirements imposed on the goods with
much flexibility in shipping and pricing, but with much protection for
payment being received. The buyer will want vice versa. Letters of credit,
if written properly, can alleviate almost any risk. The main points to
consider when negotiating terms of an international letter of credit are:
- the form of payment
- currency of payment
- advising method
- the amount of value to be covered
- which party pays the bank charges including amendments
- language tying payment to proper performance
- language allowing partial shipments, transhipments, combined shipments,
and consolidations
- language providing for any other particular need
Other Methods: Many other payment arrangements can be worked out
and are used including the seller requiring prepayment, credit cards,
forfaiting, shipping company finance, guarantees of payments, bonds, and
bank demand guarantees.
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