Getting Paid
Getting Paid
Ensuring prompt payment often worries exporters more than any other factor. The truth is that the likelihood of a bad debt from an international customer is less than from an American company. It might surprise some people that the foreign bad-debt ratio is less than half of the United States ratio. In the United States, the average bad-debt ratio often runs 1.25% or more of sales. In the experience of most international businessmen, overseas bad debts seldom exceed .5% of sales. The reason is that, in the United States, credit is a way of life. In overseas markets, credit is still something to be earned as a result of having a record of prompt payment. Use common sense in extending credit to overseas customers, but don't use tougher rules than for your American clients.
The methods of payment, in order of the risk to the seller, are: open account, consignment, time draft, sight draft, authority to purchase, letter of credit, and cash in advance.
Open Account.
The open account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment. Though this method is the riskiest, many firms that have a long-standing business relationship with the same overseas firm, use this method. Needless to say, the key is to know your buyer and your buyer's country. You should use an open account when the buyer has a continuing need for the seller's product or service. Some experienced exporters say that they only deal in open accounts. But, they always preface that statement by saying that they have close relationships and have been doing business with those overseas clients for many years. An open account can be risky unless the buyer is of unquestioned integrity and has withstood a thorough credit investigation. The advantage of this method is its ease and convenience, but with open-account sales, you bear the burden of financing the shipment. Standard practice in many countries is to defer payment until the merchandise is sold, sometimes even longer. Therefore, among the forms of payment, open-account sales require the greatest amount of working capital. In addition, you bear the exchange risk if the sales are quoted in foreign currency. Nevertheless, competitive pressures may force the use of this method.
Consignment.
The seller (consignor) retains title to the goods during shipment and storage of the product in the warehouse or retail store. The consignee acts as a selling agent, selling the goods and remitting the net proceeds to the consignor. Like open-account sales, consignment sales also can be risky and lend themselves only to certain kinds of merchandise. You should take great care in working out this contractual arrangement. Be sure you cover it with adequate risk insurance.
Bank Draft.
Payments for many sales are arranged using one of many time-tested banking methods. Bills of exchange or bank drafts sight and time are useful under certain circumstances.
A bank draft is a check, drawn by a bank on another bank, used primarily where it is necessary for the customer to provide funds payable at a bank in some distant location.
Time (date) Draft.
This draft is an order drawn by the exporter on the importer (customer), payable a certain number of days after "sight" (presentation) to the holder. Documents, such as negotiable bills of lading, insurance certificates, and commercial invoices, accompany the draft and are submitted through the exporter's bank for collection. When you present the draft to the importer at his bank, the importer acknowledges that the documents are acceptable and commits to pay by writing "Accepted" on the draft and signing it. The importer normally has 30 to 180 days, depending on the draft's term, to make payments to its bank for transmittal.
Sight Draft.
This is similar to the time draft except that the importer's bank holds the documents until the importer releases the funds. Although this method costs less than the Letter of Credit (defined later), it has greater risk because the importer can refuse to honor the draft.
<em>Bill of Lading A document that provides the terms of the contract ^ between the shipper and the transportation company to move freight between stated points at a specified charge.
Commercial or Customs Invoice A bill for the goods from the seller to the buyer. It is one method used by governments to determine the value of the goods for customs valuation purposes.
At Sight Indicates that a negotiable instrument is to be paid upon ^ presentation or demand.</em>
Authority to Purchase.
The Far East uses this method occasionally. The importer specifies a bank in the United States where the exporter can draw a documentary draft on the importer's bank. The problem with this method is that if the importer fails to pay the draft, the bank has "recourse" to the exporter for settlement. If an exporter consents to this method, it is suggested that the Authority to Purchase specify "without recourse" and so state it on the drafts.
The major risk with the time, sight, and authority-to-purchase methods is that the buyer can refuse to pay or to pick up the goods. The method of avoidance is to require cash against documents. Unfortunately, this method is slow because banks are slow in transferring funds. They want to use the time float (short-term investment of bank money) to make interest. Using a wire transfer can get around this.
Letters of Credit (L/C).
Ideally, an exporter would deal only in cash, but in reality, few businesspeople initially are able or willing to do business under those terms. Because of the risk of nonpayment due to insolvency, bankruptcy, or other severe deterioration, procedures and documents have been developed which help to ensure that foreign buyers honor their agreements. The most common form of collection is payment against a Letter of Credit (L/C). The L/C is the time-tested method whereby an importer's bank guarantees that if all documents are presented in exact conformity with the terms of the L/C, they will pay the exporter. The procedure is not difficult to understand, and most cities have banks with people who are familiar with the L/C's mechanics.
This method is understood well by traders around the world; it is simple; and it is as good as your bank. Internationally, the term most often used is "documentary credits." They involve thousands of transactions and billions of dollars every day in every part of the world. They are operated almost always in accordance with the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, a code of practice which is recognized by banking communities in 156 countries. A Guide to Documentary Operations, which includes all of the standard forms, is available by writing to the ICC Publishing Corporation, Inc., 156 Fifth Ave., Suite 820, New York, NY 10010 or ICC Services S.A.R.L., 38 Cours Albert ler, 75008 PARIS, telephone 261-85-97 or telex 650770.
An L/C is a document issued by a bank at the importer's or buyer's request in favor of the seller. It promises to pay a specified amount of money upon receipt by the bank of certain documents, within a specified time. It is a universally-used method of achieving a commercially-acceptable compromise. Think of a Letter of Credit as an escrow account, like those used when buying a house. The amount in the escrow account depends on the relationship of the buyer and the buyer's bank.
Typically, if you don't already have an account, the bank will require 100% collateral. With an account, the bank will establish a line of credit against that account. For instance, if you have $5000.00 in your account and the transaction is expected to cost $1000.00, your account will be reduced to $4000.00 and the line of credit established as $1000.00 Typical charges are as follows.
• To handle an import L/C: 1/4 of 1% of the transaction,
with a minimum of $50.00 to $100.00.
Amendments to the L/C might cost $40.00.
Negotiations (^payments) of the L/C might cost $50.00.
• To handle the export L/C: 1/10 of 1% of the transaction
with a minimum of $50-$65. Advising fees might be $45.00.
Sometimes when dealing in an open account, the exporter requires a "standby L/C". This statement means just what the name implies, the L/C is not to be executed unless payment is not made within the specified period, usually 30-60 days. Bank handling charges for standby letters of credit are usually higher than for a commercial (import) L/C.
Letters of Credit are payable at sight or on a time draft basis. Under a sight L/C, the issuing bank pays, with or without a draft, when satisfied that the presented documents conform with the forms. Under a time or acceptance L/C, once the associated draft is presented and found to be in exact conformity, the draft is stamped "accepted" and then can be negotiated as a "banker's acceptance" by the exporter, at a discount, to reflect the cost of money advanced against the draft.
<em>Revocable credit means the document can be amended or can- ^ celled at any time without prior warning or notification of the seller.
Irrevocable simply means that the terms of the document can be amended or cancelled only with the agreement of all parties thereto.
Confirmation means the United States bank guarantees payment by the foreign bank.</em>
Once the buyer and the seller agree that they will use an L/C for payment, and they have worked out the conditions or contract, the buyer or importer applies for the L/C to his or her international bank. Figure 4-1 is an example of a letter of credit application.
Using the application as its guide, the bank issues a document of credit incorporating the terms agreed to by the parties.
In Phase I, your bank notifies the seller or the seller's bank that a credit has been issued. In Phase II, the seller then ships the goods and presents the documents to the bank, at which time, the seller is paid. Phase III is the "settlement" phase, wherein, the documents are then transferred to the buyer's bank, whereupon the buyer pays the bank any remaining money in exchange for the documents. Thus, on
The three phases of documentary credit (L/C).
arrival of the goods, the buyer or importer has the proper documents for entry.
Cash in Advance.
This collection method is the most desirable, but just as in America, the foreign buyer usually objects to tying up capital. On the grounds that seeing the merchandise is the best insurance, most foreign businessmen try not to pay until they actually receive the goods. Furthermore, the buyer might resent the implication that he or she might not be creditworthy.
Ensuring prompt payment often worries exporters more than any other factor. The truth is that the likelihood of a bad debt from an international customer is less than from an American company. It might surprise some people that the foreign bad-debt ratio is less than half of the United States ratio. In the United States, the average bad-debt ratio often runs 1.25% or more of sales. In the experience of most international businessmen, overseas bad debts seldom exceed .5% of sales. The reason is that, in the United States, credit is a way of life. In overseas markets, credit is still something to be earned as a result of having a record of prompt payment. Use common sense in extending credit to overseas customers, but don't use tougher rules than for your American clients.
The methods of payment, in order of the risk to the seller, are: open account, consignment, time draft, sight draft, authority to purchase, letter of credit, and cash in advance.
Open Account.
The open account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment. Though this method is the riskiest, many firms that have a long-standing business relationship with the same overseas firm, use this method. Needless to say, the key is to know your buyer and your buyer's country. You should use an open account when the buyer has a continuing need for the seller's product or service. Some experienced exporters say that they only deal in open accounts. But, they always preface that statement by saying that they have close relationships and have been doing business with those overseas clients for many years. An open account can be risky unless the buyer is of unquestioned integrity and has withstood a thorough credit investigation. The advantage of this method is its ease and convenience, but with open-account sales, you bear the burden of financing the shipment. Standard practice in many countries is to defer payment until the merchandise is sold, sometimes even longer. Therefore, among the forms of payment, open-account sales require the greatest amount of working capital. In addition, you bear the exchange risk if the sales are quoted in foreign currency. Nevertheless, competitive pressures may force the use of this method.
Consignment.
The seller (consignor) retains title to the goods during shipment and storage of the product in the warehouse or retail store. The consignee acts as a selling agent, selling the goods and remitting the net proceeds to the consignor. Like open-account sales, consignment sales also can be risky and lend themselves only to certain kinds of merchandise. You should take great care in working out this contractual arrangement. Be sure you cover it with adequate risk insurance.
Bank Draft.
Payments for many sales are arranged using one of many time-tested banking methods. Bills of exchange or bank drafts sight and time are useful under certain circumstances.
A bank draft is a check, drawn by a bank on another bank, used primarily where it is necessary for the customer to provide funds payable at a bank in some distant location.
Time (date) Draft.
This draft is an order drawn by the exporter on the importer (customer), payable a certain number of days after "sight" (presentation) to the holder. Documents, such as negotiable bills of lading, insurance certificates, and commercial invoices, accompany the draft and are submitted through the exporter's bank for collection. When you present the draft to the importer at his bank, the importer acknowledges that the documents are acceptable and commits to pay by writing "Accepted" on the draft and signing it. The importer normally has 30 to 180 days, depending on the draft's term, to make payments to its bank for transmittal.
Sight Draft.
This is similar to the time draft except that the importer's bank holds the documents until the importer releases the funds. Although this method costs less than the Letter of Credit (defined later), it has greater risk because the importer can refuse to honor the draft.
<em>Bill of Lading A document that provides the terms of the contract ^ between the shipper and the transportation company to move freight between stated points at a specified charge.
Commercial or Customs Invoice A bill for the goods from the seller to the buyer. It is one method used by governments to determine the value of the goods for customs valuation purposes.
At Sight Indicates that a negotiable instrument is to be paid upon ^ presentation or demand.</em>
Authority to Purchase.
The Far East uses this method occasionally. The importer specifies a bank in the United States where the exporter can draw a documentary draft on the importer's bank. The problem with this method is that if the importer fails to pay the draft, the bank has "recourse" to the exporter for settlement. If an exporter consents to this method, it is suggested that the Authority to Purchase specify "without recourse" and so state it on the drafts.
The major risk with the time, sight, and authority-to-purchase methods is that the buyer can refuse to pay or to pick up the goods. The method of avoidance is to require cash against documents. Unfortunately, this method is slow because banks are slow in transferring funds. They want to use the time float (short-term investment of bank money) to make interest. Using a wire transfer can get around this.
Letters of Credit (L/C).
Ideally, an exporter would deal only in cash, but in reality, few businesspeople initially are able or willing to do business under those terms. Because of the risk of nonpayment due to insolvency, bankruptcy, or other severe deterioration, procedures and documents have been developed which help to ensure that foreign buyers honor their agreements. The most common form of collection is payment against a Letter of Credit (L/C). The L/C is the time-tested method whereby an importer's bank guarantees that if all documents are presented in exact conformity with the terms of the L/C, they will pay the exporter. The procedure is not difficult to understand, and most cities have banks with people who are familiar with the L/C's mechanics.
This method is understood well by traders around the world; it is simple; and it is as good as your bank. Internationally, the term most often used is "documentary credits." They involve thousands of transactions and billions of dollars every day in every part of the world. They are operated almost always in accordance with the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce, a code of practice which is recognized by banking communities in 156 countries. A Guide to Documentary Operations, which includes all of the standard forms, is available by writing to the ICC Publishing Corporation, Inc., 156 Fifth Ave., Suite 820, New York, NY 10010 or ICC Services S.A.R.L., 38 Cours Albert ler, 75008 PARIS, telephone 261-85-97 or telex 650770.
An L/C is a document issued by a bank at the importer's or buyer's request in favor of the seller. It promises to pay a specified amount of money upon receipt by the bank of certain documents, within a specified time. It is a universally-used method of achieving a commercially-acceptable compromise. Think of a Letter of Credit as an escrow account, like those used when buying a house. The amount in the escrow account depends on the relationship of the buyer and the buyer's bank.
Typically, if you don't already have an account, the bank will require 100% collateral. With an account, the bank will establish a line of credit against that account. For instance, if you have $5000.00 in your account and the transaction is expected to cost $1000.00, your account will be reduced to $4000.00 and the line of credit established as $1000.00 Typical charges are as follows.
• To handle an import L/C: 1/4 of 1% of the transaction,
with a minimum of $50.00 to $100.00.
Amendments to the L/C might cost $40.00.
Negotiations (^payments) of the L/C might cost $50.00.
• To handle the export L/C: 1/10 of 1% of the transaction
with a minimum of $50-$65. Advising fees might be $45.00.
Sometimes when dealing in an open account, the exporter requires a "standby L/C". This statement means just what the name implies, the L/C is not to be executed unless payment is not made within the specified period, usually 30-60 days. Bank handling charges for standby letters of credit are usually higher than for a commercial (import) L/C.
Letters of Credit are payable at sight or on a time draft basis. Under a sight L/C, the issuing bank pays, with or without a draft, when satisfied that the presented documents conform with the forms. Under a time or acceptance L/C, once the associated draft is presented and found to be in exact conformity, the draft is stamped "accepted" and then can be negotiated as a "banker's acceptance" by the exporter, at a discount, to reflect the cost of money advanced against the draft.
<em>Revocable credit means the document can be amended or can- ^ celled at any time without prior warning or notification of the seller.
Irrevocable simply means that the terms of the document can be amended or cancelled only with the agreement of all parties thereto.
Confirmation means the United States bank guarantees payment by the foreign bank.</em>
Once the buyer and the seller agree that they will use an L/C for payment, and they have worked out the conditions or contract, the buyer or importer applies for the L/C to his or her international bank. Figure 4-1 is an example of a letter of credit application.
Using the application as its guide, the bank issues a document of credit incorporating the terms agreed to by the parties.
In Phase I, your bank notifies the seller or the seller's bank that a credit has been issued. In Phase II, the seller then ships the goods and presents the documents to the bank, at which time, the seller is paid. Phase III is the "settlement" phase, wherein, the documents are then transferred to the buyer's bank, whereupon the buyer pays the bank any remaining money in exchange for the documents. Thus, on
The three phases of documentary credit (L/C).
arrival of the goods, the buyer or importer has the proper documents for entry.
Cash in Advance.
This collection method is the most desirable, but just as in America, the foreign buyer usually objects to tying up capital. On the grounds that seeing the merchandise is the best insurance, most foreign businessmen try not to pay until they actually receive the goods. Furthermore, the buyer might resent the implication that he or she might not be creditworthy.
Comments
Post a Comment