Terms of Payment
Terms of payment refers to the manner by which the seller will be paid for his goods. Terms of payment can range from insisting on cash in advance to conventional billing of regular customers on, say, a monthly basis. Payment can also be in the form of another good, which is known as bartering or countertrade.
The payment can be made in the followings ways
Open Account
This is the least secure method of trading for the exporter, but the most attractive to buyers. Goods are shipped and documents are remitted directly to the buyer, with a request for payment at the appropriate time (immediately, or at an agreed future date). An exporter has little or no control over the process, except for imposing future trading terms and conditions on the buyer. Clearly, this payment method is the most advantageous for the buyer, in cash flow and cost terms. As a consequence, Open Account trading should only be considered when an exporter is sufficiently confident that payment will be received.
Advance Payment
The most secure method of trading for exporters and, consequently the least attractive for buyers. Payment is expected by the exporter, in full, prior to goods being shipped.
As one might imagine, having covered the two extremes of payment risk for both the importer and exporter, commercial decisions have to be made and this usually results in selecting one of the middle rungs of the ladder. This is where banking products such as Bills for Collection and Letters of Credit come in to play.
Bills for Collection
More secure for an exporter than Open Account trading, as the exporter’s documentation is sent from a Canadian bank to the buyer’s bank. This invariably occurs after shipment and contains specific instructions that must be obeyed. Should the buyer fail to comply, the exporter does, in certain circumstances, retain title to the goods, which may be recoverable. The buyer’s bank will act on instructions provided by the exporter, via their own bank, and often provides a useful communication route through which disputes are resolved.
Documents against Payment (D/P)
Usually used where payment is expected from the buyer immediately, otherwise known as “at sight”. This process is often referred to as “Cash against Documents”.
Documents against Acceptance (D/A)
Used where a credit period (e.g. 30/60/90 days – ‘sight of document’ or from ‘date of shipment’) has been agreed between the exporter and buyer. The buyer is able to collect the documents against their undertaking to pay on an agreed date in the future, rather than immediate payment. The exporter’s documents are usually accompanied by a “Draft” or “Bill of Exchange” which looks something like a cheque, but is payable by (drawn on) the buyer. When a buyer (drawee) agrees to pay on a certain date, they sign (accept) the draft. It is against this acceptance that documents are released to the buyer. Up until the point of acceptance, the exporter may retain control of the goods, as in the D/P scenario above. However, after acceptance, the exporter is financially exposed until the buyer actually initiates payment through their bank.
Letter of Credit
A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
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