Terms of payment
Both sides face risks in an import-export transaction. This is because there is always the possibility that the other side may not fulfil the contract.
For the exporters:
- The risk of the buyers’ default; the customers might not pay in full for the goods.
- The importers might go bankrupt;
- a war might start or the importers’ government might decide to ban trade with the exporting country or they might ban imports of certain commodities.
- Importers might run into difficulties getting the foreign exchange to pay for the goods.
- The importers are not reliable and simply refuse to pay the agreed amount of money.
For the importers:
- The risk that the goods will be delayed and they might only receive them a long time after paying for them.
- This may be caused by port congestion or strikes.
- Delays in fulfillment of orders by the exporters and difficult customs clearance in the importing country.
- There is also a risk that the wrong goods might be sent.
Many of the risks in foreign trade are reduced by the work of the banks. They provide different services, which give security to exporters and importers.
The risk of the buyer default or non-delivery by the exporters is removed by payment against shipping documents. Also, the exporters’ banks provide information about the financial reliability of their customers. They also help arrange buyer credit or finance for the sellers.
There is also a risk of financial loss because of a change in the exchange rate. This kind of loss can happen in any export-import situation where the national currencies go up and down in terms of the payment currency. But the risk can be avoided, with the help of a bank, by buying the foreign exchange on the forward exchange market. Traders in bank can base their calculations on fixed exchange rates and avoid uncertainty and risk of loss.
There exist two groups of terms and conditions of the sales contract regarding payment: currency and financial
Currency terms include price currency and payment currency which have to be adjusted by the application of the corresponding exchange rate if the contract stipulates that these are different currencies.
Financial terms comprise first, ways of payment (advance, cash and credit), second, forms of payment (open account, collection, bank transfer and letter of credit), third, means of payment (bills of exchange, cheques and money as it is), and, fourth, various types of bank guarantees, when importers’ and exporters’ banks interact, such as acceptance, aval or other banks’ guarantees.
Ways of Payment
Payment in cash implies making full payment through a bank when the goods are ready for shipment or when they are being handed over. Payment is made after exporters’ notification about the readiness of the goods for dispatch or while passing the documents of title to the importers. This way of payment is only possible when the partners have been collaborating for a long period of time and their relations are based on mutual trust.
Payment on credit suggests payment for the goods after they have been delivered, i.e. the exporters give the right to pay by installments. This way of payment is used when the exporters are particularly interested in selling their goods. However, in this situation the exporters may increase the price for the goods and require the importers’ bank guarantee.
Payment in advance means partial (10-30%) or complete (100%) payment beforehand for the goods before their dispatch. The importers credit the exporters, for example, the contract may stipulate a 10 or 15 per cent advance payment, which is advantageous for the sellers. This way of payment is used when the buyers are unknown to the sellers or in the case of a single isolated transaction or as part of combination of different ways, forms and methods of payment in a large-scale contract.
Forms of Payment
A form of payment is a mode and procedure of transferring goods and payment documents through a bank. A bank transfer denotes the movement of money by the importers’ bank on the basis of its payment order to the exporters’ account. It is made from the buyers’ bank account to the sellers’ in accordance with the buyers’ letter of instruction. Actually this form of payment may sometimes take several months, which is naturally very disadvantageous to the sellers. The transfer is carried out at current rates of exchange. The bank transfer is used where there is complete trust between sellers and buyers. The buyers don’t need to open any account but they are to notify the sellers about the code of the transfer.
An open account stipulates periodical payments by the importers onto the open account of the exporters after the goods have been sent with due regard for the current backlog. The open account agreement is usually granted by the sellers to the regular buyers in whom the sellers have complete confidence, but sometimes it is granted when the sellers want to attract new buyers, then they risk their money for that end. Actual payment is made monthly, quarterly or annually as agreed upon. This form is disadvantageous to the exporters, but may be good to gain new markets.
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