Payment Methods
Payment Methods
Any exporter will wish to minimise the credit risk, so any method of payment you agree should be appropriate to the risks you run. The main factors affecting payment terms you would wish to consider are:
* Your own cash-flow situation - this will decide the credit terms you are willing to offer your customer.
* The payment terms acceptable in your customer's country, e.g. a Letter of Credit for Nigeria, open account trading for Northern Europe.
* The bank charges involved, particularly where small quantities of a product are involved. Profit margins can quickly be eroded.
* The shelf-life of your product - you will want to avoid offering a credit period which is longer than the life of your product.
* What are your competitors offering? If they are trading on an open account basis you are likely to have to do likewise in order to break into the market.
The methods of payment available, starting with the most secure, are:
* Advance Payment - ensures that payment is cleared before the goods are shipped. A bank transfer is the quickest method of clearing funds.
* Letters of Credit - these can be unconfirmed, but are much safer if confirmed by a UK bank and should be irrevocable to carry real safety. To ensure payment you must comply strictly with the documentary requirements of the credit. See SITPRO's separate briefing on Letters of Credit - An Introduction.
* Documentary Collection - this is raised by the exporter and made out to the customer's bank. It is then sent to the customer for acceptance and can be avalised (guaranteed) by the bank for additional safety.
* Open Account - credit terms can be 30, 60 days or more. This method of payment is recommended only when none of the above methods are suitable. Payments should be by bank transfer rather than cheque that could take months to clear.
Money Transfers
* SWIFT Inter-Bank transfer - now firmly established as standard practice in the major trading nations. Your customer will instruct his bank to make payment to any bank account specified by you. It is good practice, therefore, to include account details on your invoice.
* Buyer's Cheque - an unsatisfactory method of settlement. It carries the risk of dishonour upon presentation as well as the added inconvenience of being slow to clear. You should only use this method if you have an established trading history with your customer or where you have increased your profit margin to offset cash-flow problems caused by delays in receiving payment.
* Banker's Draft - arranged by your customer who instructs his bank to raise a draft on its corresponding UK bank. It provides additional security to a Buyer's Cheque but can be costly to arrange and runs the risk of loss in transit.
* International Money Orders - these are similar to postal orders and are pre-printed. They are therefore cheaper to obtain than a Banker's Draft but, again, run the risk of loss in transit.
Tags
cash flow situation sitpro profit margins documentary collection small quantities account basis documentary requirements credit period letters of credit credit risk advance payment letter of credit northern europe shelf life cheque swift nigeria money
Any exporter will wish to minimise the credit risk, so any method of payment you agree should be appropriate to the risks you run. The main factors affecting payment terms you would wish to consider are:
* Your own cash-flow situation - this will decide the credit terms you are willing to offer your customer.
* The payment terms acceptable in your customer's country, e.g. a Letter of Credit for Nigeria, open account trading for Northern Europe.
* The bank charges involved, particularly where small quantities of a product are involved. Profit margins can quickly be eroded.
* The shelf-life of your product - you will want to avoid offering a credit period which is longer than the life of your product.
* What are your competitors offering? If they are trading on an open account basis you are likely to have to do likewise in order to break into the market.
The methods of payment available, starting with the most secure, are:
* Advance Payment - ensures that payment is cleared before the goods are shipped. A bank transfer is the quickest method of clearing funds.
* Letters of Credit - these can be unconfirmed, but are much safer if confirmed by a UK bank and should be irrevocable to carry real safety. To ensure payment you must comply strictly with the documentary requirements of the credit. See SITPRO's separate briefing on Letters of Credit - An Introduction.
* Documentary Collection - this is raised by the exporter and made out to the customer's bank. It is then sent to the customer for acceptance and can be avalised (guaranteed) by the bank for additional safety.
* Open Account - credit terms can be 30, 60 days or more. This method of payment is recommended only when none of the above methods are suitable. Payments should be by bank transfer rather than cheque that could take months to clear.
Money Transfers
* SWIFT Inter-Bank transfer - now firmly established as standard practice in the major trading nations. Your customer will instruct his bank to make payment to any bank account specified by you. It is good practice, therefore, to include account details on your invoice.
* Buyer's Cheque - an unsatisfactory method of settlement. It carries the risk of dishonour upon presentation as well as the added inconvenience of being slow to clear. You should only use this method if you have an established trading history with your customer or where you have increased your profit margin to offset cash-flow problems caused by delays in receiving payment.
* Banker's Draft - arranged by your customer who instructs his bank to raise a draft on its corresponding UK bank. It provides additional security to a Buyer's Cheque but can be costly to arrange and runs the risk of loss in transit.
* International Money Orders - these are similar to postal orders and are pre-printed. They are therefore cheaper to obtain than a Banker's Draft but, again, run the risk of loss in transit.
Tags
cash flow situation sitpro profit margins documentary collection small quantities account basis documentary requirements credit period letters of credit credit risk advance payment letter of credit northern europe shelf life cheque swift nigeria money
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