Making sure your business gets paid for its export shipments is usually top of the priority list for exporting companies. This is not just limited to ensuring the payment is received but also making sure it arrives as quickly and efficiently as possible, so there are no adverse effects on cash flow. Broadly speaking, there are 5 international payment options available to exporters;
This is the most secure payment method for exporters and is the best option for security and cash flow. However, in some export destinations, facilitating advance payment is a difficult and time-consuming process and in some cases prohibited by the country’s legislation. If you don’t offer any kind of credit period or alternative payment method, there is also the possibility that it will make you less appealing to potential buyers.
Letter of Credit
Often abbreviated to just L/C, a Letter of Credit is a guarantee of payment given by a bank that says if a seller satisfies the terms, conditions and documentary requirements set out in the Letter of Credit, they will be paid the agreed amount. (For those new to Letters of Credit, see our Beginner’s Guide here). It is a very secure means of getting paid because as long as the terms of the L/C are workable in the first place, the seller is in control of receiving their payment. The drawback of L/Cs is that they are the most expensive payment method when banking charges are factored in. They can also prove complex and mistakes are often made by those who are not familiar with them. Letters of Credit are however a globally accepted method of payment and are in fact the mandatory form of paying for foreign goods in certain countries.
Avalised Bills of Exchange
This method follows a similar process to an L/C whereby a set of shipping documents along with Bills of Exchange are sent by the seller’s bank to the buyer’s bank on a collection basis (see below for further details of Documentary Collections). However, the buyer’s bank does not check all the shipping documents as they would under an L/C They do, however, ‘avalise’ the Bills by adding the words “pour aval” to the back and then authorised signatories of the buyer’s bank sign them. These Bills are then sent to the buyer to accept by signing and stamping. Once this process is complete, the bank will add it’s guarantee of payment by holding the buyer liable to pay the Bills at maturity. Once avalised and accepted, the shipping documents are released to the buyer. The charges involved in avalising Bills are less than with a Letter of Credit as the buyer’s bank’s risk period and the processing responsibilities are reduced.
A Documentary Collection (also sometimes referred to as Cash Against Documents) also have similarities with Letters of Credit in that the shipping documents are delivered to the buyer through a bank. The buyer needs to agree to pay for the goods before the bank will release any shipping and/or title documents to them. The fundamental difference to an L/C or avalised Bills process is that while the bank will hold the documents, they won’t guarantee or enforce the payment. As the bank plays less of a key role in Collection payments though, the charges are significantly reduced.
Offering credit terms to a foreign buyer clearly brings the biggest risk in terms of payment security. The flip side of this is that it will be an attractive proposition for buyers. This type of payment for export shipments should only be considered for companies that have developed an established and trustworthy relationship with their buyers, or at a minimum, have local representation in the country of export. We also strongly recommend exporters consider export credit insurance to protect against payment default.
At Access to Export, we have a wealth of experience in exporting goods and preparing all documents required for the various types of international trade payment methods. We can handle the whole process on your behalf thus securing your payments and removing the administrative burden.
If you need any advice or practical support on matters relating to international trade payments, or other areas of exporting, get in touch with us to see how we can support your business with its export activities.