Export Payment Terms
Export payment terms are an essential aspect of international trade that determines how payment for goods or services will be made between the buyer and the seller. With the increase in globalization, it has become necessary for businesses to understand and use the appropriate payment terms to ensure smooth and secure international transactions.
These are Export Payment Term, receiving the payments from Foreign Buyers or Importers
1) Payment Through L/C
2) Payment Against Documents Collection
3) Payment Against B/L copy
4) Payment Against Documents Acceptance (DA) with 30, 45 & 60 days
5) Cash Against Documents
6) 100 % TT Payment
7) Payment through Foreign Third Party Collection and Remittance
The different types of export payment terms and their advantages and disadvantages, as well as the factors to consider when choosing the right payment term.
Types of Some Export Payment Terms
This payment term requires the buyer to make full payment before the seller ships the goods. This payment term is most suitable when the buyer has a high level of trust in the seller or when the goods are of high value.
Advantages: The seller gets payment before shipment, reducing the risk of non-payment. It also provides the seller with immediate cash flow to fund production.
Disadvantages: The buyer bears the risk of non-delivery or non-compliance by the seller, as they have paid in advance.
Under this payment term, the seller ships the goods and invoices the buyer, who then pays at a later date, usually within 30, 60, or 90 days after delivery. This payment term is most suitable when the buyer and seller have an established relationship and trust each other.
Advantages: It is convenient for both the buyer and seller, as there is no need for payment before shipment. It also provides the buyer with a longer credit period.
Disadvantages: The seller bears the risk of non-payment, as they have shipped the goods without receiving payment. It may also affect the seller’s cash flow, as they have to wait for payment.
Letter of Credit (LC)
This payment term involves the use of a bank to facilitate the payment between the buyer and seller. The buyer opens an LC with their bank, which guarantees payment to the seller upon the submission of certain documents.
Advantages: The seller is assured of payment once they comply with the LC terms. It also provides a secure payment method for both parties.
Disadvantages: It can be costly and time-consuming to set up an LC. The seller also has to comply with strict documentation requirements, which can be challenging.
Factors to Consider When Choosing Payment Terms
The relationship between the buyer and seller
The level of trust and confidence between the buyer and seller is an essential factor to consider when choosing the payment term. A high level of trust and an established relationship can allow for more flexible payment terms.
The risk involved
The level of risk involved for both the buyer and seller is another crucial factor to consider. For instance, if the seller is unsure of the buyer’s creditworthiness, they may opt for a more secure payment term like LC.
The cost involved
The cost of each payment term should also be considered, as some payment terms may be more costly than others. For instance, LCs can be expensive to set up and maintain, making them less suitable for small transactions.
Choosing the right export payment term is crucial for the success of any international transaction. Businesses should carefully consider the factors involved and select the payment term that best suits their needs and requirements. By doing so, they can ensure smooth and secure international transactions and minimize the risk of non-payment or non-delivery.