Once you find the right buyer for your export products, an important aspect remains for you as the seller. “These are the terms of payment in export”. It is an intrinsic part of any trade in which the importing party, along with the exporting party, agrees to the finalized mode of payment. This may involve lots of negotiation. They will decide the export payment terms between buyer and seller.
In case you are a new exporter, there is some risk involved in invoices. They specify the total amount for the products, together with the preferred method of payment. Export payment terms also differ more and are much riskier. This is due to factors such as physical distance and differing laws among the 2 parties in different countries.
That is why there exist varieties of terms of payment in export which exporters and importers can take advantage of. All these are mutual terms of the agreement but differ from each other. Some might be more favorable to the exporter, while others might favor more the importer.
The payment terms for export also depend upon the previous relationship and trading history between the 2 parties. So, how many forms of payment in export are there? And how can you choose the best one for you? Read on to find out!
What Are The Different Terms Of Payment In Export?
Clean Payments
‘Clean payments’ are the first 2 terms of payments in export. In these, all the shipping documents only circulate between the 2 parties involved directly. These are usually uncomplicated and low-priced since no third party is involved as well.
1. Open Account
Out of a plethora of terms of payment in export, an open account is based upon trust and biases towards the buyer or importer. The payment is made after the receipt of the goods. A credit period is agreed upon beforehand for a minimum number of certain days and at the end, the payment is made.
Besides, even the dates of the receipts of the purchase order and a final payment(s) lie far apart. The time is taken for production and shipment.
This method can turn out to be more beneficial to the buyer, as the last payment is made when the goods have arrived. The exporter has to bear a wide time gap before getting his amount. This is the reason why this method is generally accepted by parties that trust each other at extremely high levels or if there is a promise of high volume levels later on.
2. Cash in Advance
The cash-in-advance payment method acts on the very opposite of an open account, where the goods are shipped only after the payment, partial or full has been completed from the buyer’s end. It is for which a receipt of payment has to be produced. This is a highly favorable method for the exporter but a significant risk for the importer or buyer.
3. Documentary Collection
The third in the terms of payment in export is known as a documentary collection. The method involves the involvement of a third party, and that is the bank. Both parties involve their own banks. First of all, the exporter ships the products. They then send the shipping documents and collect orders to their own bank. This bank then sends this to the importer’s bank along with instructions.
It’s subsequently passed on to the importer, who makes the payment to his own bank. Finally, there’s a bank-to-bank transfer before the amount reaches the exporter. Basically, there exist 2 types of Documentary collections, which are:
- Password: This term of payment applies when the importer is compelled to pay his amount “due at sight”. This simply means that the buyer makes a payment before the documents are released from his bank or the collecting bank.
- Documents against acceptance: There needs to be an arrangement for this form of payment. This would help the buyer to make a return payment after a duration of time. There is a time draft, which is accepted by the exporter, promising to stick to it. The documents regarding this are returned to the apparent buyer via the bank after the acceptance.
How to Start Import Export Business in India
4. Letter of Credit
One of the most common terms of payment in export is the letter of credit. This is because of the reliability and common nature that the mode possesses across international trade borders. In this method, a Letter of Credit is issued by the bank of the buyer and it serves as a commitment to the exporter. This letter of credit serves as a pledge with respect to the completion of the payment to the seller in a timely manner.
5. Consignment
The consignment type of payment applies to the export, which involves a third-party distributor. In this case, the exporter gives their goods to a foreign distributor who sells them to the buyer. Through the consignment means, the exporter is paid after the goods have been sold to the end customer. Basically, it is very near to the open account method of payment.
As with the open account method, this should be chosen only when the third-party distributor is reliable and reputable. Also, a insurance of the same should be availed by the exporter.
Conclusion
The situation these days wants every exporter to give his best offer, coupled with appropriate prices and the right payment methods, to customers in the global market. These are major reasons why such dual terms of payment in export are essential knowledge every exporter and importer should be accustomed to.
Other than payment terms in export and import, there are scores and scores of terms and import–export knowledge that one needs to undertake his export. You need the right market trends. You also need trustworthy buyers, accurate documents, and customs clearance. You must also have practical experience. With these, you can learn to export the right way with the Import Export Federation. Start your journey now with our online and offline courses, port visits, and market tours. Thus, with the help of GFE Business you can get the best answers for more detail regarding the terms of payment in export and Impot contact as soon as possible.
