Payment in Overseas Trade
The exporter will not wish to part with the goods until he has received payment or at least confirmation that his draft has been accepted by a creditworthy entity such as a bank. The buyer, on the other hand, will wish to postpone payment until the goods or documents are in his possession control.
In order to minimise the risks of non-payment in exporting, it is essential to research market conditions in the relevant country and the creditworthiness of potential customers. The political situation, economic situation, foreign exchange and banking conditions in the country of export should be assessed.
A credit check should be undertaken in relation to potential overseas customers. Banks and agencies may be able to provide a status check. The check may confirm the details of the business. It may be able to confirm whether it is certified under the authorised economic operator certification system. This scheme is aimed at reducing security risks in the supply chain.
Managing customers payments overseas can be burdensome. It is possible to outsource credit control. Specialist firms may be positioned to obtain company information, check details, set credit limits and chase overseas payments.
The sale contract should stipulate the time, mode, place and currency of payment. International trade custom has developed various methods of payment to deal with the risks and conflicting interests. The exporter wishes to obtain the purchase price as soon as possible, while the buyer will wish to first confirm that the goods conform to the contract.
The following methods of payment, which are used in domestic trade may be feasible and appropriate in many international cases:
- Interbank transfer. The customer pays directly into a bank account that is nominated.
- Buyer’s cheque. This is a cheque payable to the exporter drawn on the importer’s account. This can be risky, can be countermanded, dishonoured or lost in transit.
- Bank draft. This is a cheque payable to the exporter drawn against the customer’s bank. This provides more security, but it introduces costs.
- International money orders. These are documents that can be exchanged for cash in the supplier’s country at a Post Office or through the issuer’s office.
- Debt and credit cards. These may offer fast solutions. There are risks that a charge might be disputed and reversed.
There is a range of payment terms to and by overseas suppliers and business customers. These range from payment in advance to full open credit.
Payment in advance involves taking payment before dispatching goods. Many trade customers will not wish to pay in advance given that they suffer the risk of non-delivery and incur cash flow costs.
At the other end of the spectrum is payment on Open Account. This is equivalent to offering unconditional credit. The goods are supplied and invoiced to the customers. This carries the highest risk for the exporter. This is more appropriate when there is an established relationship and confidence in relation to payment.
The following methods represent intermediate positions between the above two extremes, which are commonly used in international trade.
Payment in Cash
In a simple case, the parties may agree on pre-payment of cash with the order. The buyer takes the risk of non-delivery and the delivery of non-conforming goods. Equally, the buyer may be obliged to pay at or within a set period after delivery. The buyer receives considerable assurance and obtains credit. The seller takes the risk of delayed payment and non-payment.
The parties might agree that the buyer should remit the purchase price after he is presented with the documents of title to the goods. This may be appropriate when the exporter is acquainted with the financial status of the buyer and is happy with his solvency. The exporter sends the documents to the buyer who thereafter remits the purchase money by post or interbank transfer.
If the exporter is not familiar with the financial status of the buyer he can arrange that the purchase price is paid directly against the documents or against delivery of the goods. This arrangement is suitable where delivery of the goods takes place remotely from the seller’s place of business.
Letters of Credit
Letters of credit are one of the safest and most common methods of payment by overseas customers. The requirement for payment by letter of credit will be provided in the sale contract for the goods.
There are different types of letter of credit. The customer arranges a letter of credit with his bank. The customer pays commission to his bank.
The customer’s bank effectively agrees to pay the supplier’s bank once the necessary paperwork and documents are presented without discrepancy, and any stipulated conditions are complied with. Provided the exporter’s documentation is in order, there is a guarantee of payment on time.
The goods are represented by the bill of lading which is a shipping document which also is a title document to the goods, i.e. proves ownership. The bill of lading is available for presentation once the goods have been shipped. It can be remitted to the buyer’s bank before the goods arrive.
The paying bank is prepared to pay the exporter because it holds the documents as security. The paying bank (seller’s / exporter’s bank) will usually have recourse to the issuing bank (buyer’s importer’s bank) which will have recourse to the importer its customer if there is a failure to pay.
Letter of Credit Practice and Procedure
Rules issued by the International Chamber of Commerce standardise banking practice in relation to letters of credit. These rules are commonly incorporated in sale contracts.
The importer applies to his bank which is referred to as the “issuing bank” to open a letter of credit in favour of the exporter. The issuing bank makes an arrangement with a bank in the exporter’s country (called the advising bank) to pay or accept the exporter’s draft (drawn by it in payment to itself) upon delivery of the transport documents by the exporter.
The advising bank may also confirm the letter of credit which means that it is liable on the letter of credit. This is a confirmed letter of credit. This means that the bank in the exporter’s country is also directly responsible for payment so as to provide enhanced security.
The exporter can collect payment when the goods are shipped provided that he complies with the terms and conditions of the letter of credit. A key condition will be the presentation of the transport/title documents for the goods. The exporter has the guarantee of the issuing bank and in the case of a confirmed letter of credit has the guarantee of the advising bank in his home country.
Bill of Exchange
A Bill of Exchange is an unconditional promise to pay, much like a bank draft/cheque. Payment cannot be refused because of some alleged failure to perform the transaction for which the Bill of Exchange is payment. A Bill of Exchange can be endorsed or “negotiated” in much the same way as a cheque.
In international trade, the exporter (the drawer) draws a bill of exchange on the importer (called the drawee). The payer may be the exporter itself or a third party. Once the bill of exchange is accepted by the drawee (the importer) the drawee is liable on the bill of exchange as if he had written a cheque.
The bill of exchange may be for immediate payment but more commonly allows for a period of credit; where it is payable at a specified future date (e.g. 90 days). Various clauses must be or may be inserted providing for the place, date and currency of payment, the payment of interest and dealing with liability for bank charges.
The exporter may receive immediate payment of a slightly lesser amount by endorsing it for a discount to a bank or other third party. Alternatively, the exporter can apply for credit on the security of the bill.
In a documentary collection, the exporter or his bank prepare a bill of exchange drawn on the importer. The bill of lading, which gives title to the goods and the other required documents, are not released until the importer accepts the bill. At this stage, the importer is unconditionally liable on the bill.
An overseas bank acting for the exporter’s bank will release the documents allowing the importer to take the goods once the importer accepts the bill of exchange. There is still the risk of non-payment unless the Bill of Exchange has been guaranteed by the Bank. However, the bill can be unconditionally enforced in summary proceedings. The buyer may not defend proceedings by reference to an alleged breach of contract.
This mechanism of payment allows the exporter to keep control of the goods. Payment is due in accordance with the date for payment of the bill, which may be immediate or deferred. here is an exchange of the title to the goods for acceptance or payment on the bill. If the Bill of Exchange is not accepted, the ownership of the goods will be retained although it will be in the customer’s country.
Exporters generally prefer to be invoiced and to pay in their local currency. If the exporter insists on payment in the home currency, non-domestic business might be lost in some cases. Accepting foreign currency will carry conversion and commission costs. The exporter carries the risk of devaluation between the time the goods are supplied and the time they are paid for.
Financial institutions sell a variety of products to cover currency risk. Hedging operates by taking a countervailing position to the anticipated cash flow. The products may be bespoke or standardised. There exist sophisticated products and markets covering currency risk which allow an immediate fixation of the future exchange rate.
The EU has entered numerous treaties on trade which incorporate protection for investors and seek to the minimise financial and legal risks which they face. Key elements of these agreements include:
- provisions for equal and non-discrimination treatment of investors and their investments.
- compensation for expropriation,
- free transfer and repatriation of capital access to independent settlements of disputes.
Double taxation treaties can provide relief against double taxation where it might otherwise arise,
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