Exporting Basics: Getting Paid
How do I get paid for export sales? What are the risks of different payment methods?
The different export payment methods are described below from the most to the least secure:
Cash in advance. Payment by credit card or wire transfer gives you faster access to your money and avoids collection problems. However, foreign buyers usually won’t agree to advance payment, because it creates cash flow problems and increases their risks.
Letter of credit (L/C). With an irrevocable, confirmed L/Cs a bank takes on the obligation to pay -- first the buyer’s bank (the buyer having pledged the money); then a confirming bank in the seller’s country. Your obligation as seller is to comply with all the terms and conditions specified in the L/C. An L/C can be at sight (immediate payment upon presentation of documents); or a time or date L/C (payment to be made at a specified future date). You get paid when the confirming bank receives the funds from the buyer’s bank and determines that you’ve met all the terms and conditions.
Documentary drafts. These are also known as bills of exchange and are analogous to a foreign buyer's check. Like checks used in domestic commerce, drafts sometimes carry risks of default. A sight draft is used when you want to retain title to the shipment until it reaches its destination and is paid for. Before the cargo can be released, the buyer must properly endorse the original ocean bill of lading and give it to the carrier, since it’s a document that evidences title. Air waybills of lading, on the other hand, do not need to be presented in order for the buyer to claim the goods. Hence, there is a greater risk when a sight draft is being used with an air shipment. Consult with your bank on an appropriate strategy for negotiating drafts.
If you want to extend credit to the buyer, you can use a time draft to state that payment is due within a certain time after the buyer accepts the draft and receives the goods (e.g., 30 days after acceptance). By signing and writing "accepted" on the draft, the buyer is normally obligated to pay within the stated time. When this is done the draft is called a trade acceptance and can be either kept by you until maturity or sold to a bank at a discount for immediate payment. A date draft differs slightly from a time draft in that it specifies a date on which payment is due, rather than a time period after the draft is accepted. When a sight draft or time draft is used, a buyer can delay payment by delaying acceptance of the draft.
A date draft can prevent this delay in payment but still must be accepted. When a bank accepts a draft, it becomes an obligation of the bank and creates a negotiable investment known as a banker's acceptance. This can also be sold to a bank at a discount for immediate payment.
Open account. Under open account, you would ship the goods and expect to get paid at an agreed future date. Foreign buyers prefer to buy on open account, as they have access to the goods before having to pay. Open account sales therefore involve more risk to the exporter. The risk can be mitigated by insuring the shipment against default. Such insurance, known as export credit insurance, can be obtained from the U.S. Export-Import Bank. Uninsured open account should be avoided unless the buyers are well established, have solid payment records, or have been thoroughly checked for creditworthiness. Some of the largest firms abroad make purchases only on open account.
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