Common Payment Terms In Export And Import Business

The choice of payment terms is based on a number of things, such as the goods being sold, the buyer's and seller's financial security, and the amount of risk in each country. When doing business abroad or at home, these are the most popular ways to pay:

Cash In Advance (CIA)

One of the best ways for sellers to get paid is in cash ahead of time. The buyer pays for the things in full before they are shipped under this deal. Because the seller gets paid up front, there is less risk for them, but the buyer has to pay before getting the goods, which is a big load.

Most of the time, this payment term is used when the seller and buyer are new to each other or when working with markets that are high risk. While it protects importers, it could turn off potential buyers, especially in markets where prices are high and buyers want to test the goods before paying for them in full.

Letter Of Credit (LC)

An overseas payment term called a "Letter of Credit" is used a lot. A bank promise tells the seller that they will get paid if they follow the terms that were agreed upon. Some Letters of Credit can be revoked, others can't be revoked, and there are also proven and disputed types.

• Revocable vs Irreversible LC: A revocable LC may be revised or cancelled at any time by the importer or their bank, but an irreversible LC cannot be changed unless all parties concerned agree.
• Unconfirmed LC vs Confirmed LC: An unconfirmed LC only includes the importer's bank, while a confirmed LC is backed by a second bank, usually in the exporter's country, lending extra protection.

Letters of credit (L/Cs) protect both parties. The buyer will only be paid if the goods are delivered according to the terms of the deal, and the seller will be paid if they do so.

Documentary Collection (DC)

When a documentary collection is used, the exporter sends goods to the importer but keeps the shipping papers, like the bill of lading, until the buyer pays. The bank sends the papers to the importer's bank as a go-between. Payment is made when the documents are shown.

Sight Draft vs. Time Draft: With a sight draft, you have to pay as soon as the papers are handed over, but with a time draft, you can pay after a certain amount of time. This term somewhat protects the parties, but not as much as they would be by an L/C.

Open Account

One of the best payment options for buyers is an open account, which lets them get the things before making any payments. It is usually used when the seller and buyer have known each other for a long time and trust each other. When the things are shipped, the buyer has a certain amount of time (30, 60, or 90 days) to pay for them.

This is helpful for the buyer, but it puts the seller at risk of not getting paid. Because of the trust that is needed, this term is usually only used for long-term relationships with solid financial records. But you shouldn't do that when you're dealing with new or risky markets.

Consignment Sales

When an exporter sends goods to a buyer on assignment, the exporter keeps ownership of the goods until they are sold to end customers. People who bring things into a country only pay for them when they are sold. This kind of deal is popular in fields like shopping, and it can help the parties build long-lasting relationships. But it's risky for producers because they have to believe that the buyer will take care of the goods and pay on time.

Innovative Payment Terms To Improve Cash Flow

Trade Credit Insurance

Exporters can get trade credit insurance to make sure they get paid even if the buyer goes bankrupt, there is political trouble, or something else unexpected happens. Exporters are more likely to give longer payment terms, like open accounts, when they have insurance. This insurance makes sure that the seller will get paid even if the buyer doesn't. This increases cash flow and lowers financial risk.

Escrow Accounts

An escrow account is a third-party account that holds money for both parties until they meet their contractual responsibilities. This can be very helpful in high-value deals where both the buyer and seller want to make sure that the payment is only released when the goods are received in good condition. Escrow gives both parties a sense of security by making sure that neither can get to the money before they're supposed to.

Digital Payment Solutions

As blockchain technology and cryptocurrencies become more famous, digital payment methods are being used more and more in foreign trade. Blockchain is an independent tool that lets trades happen safely and openly without the need for middlemen.

Cryptocurrency purchases, like Bitcoin or Ethereum, are also becoming more popular. They are faster, cheaper, and safer than standard bank withdrawals. These digital options can make payments much more efficient, especially for small and medium-sized businesses (SMEs) that do business around the world.

Factors Influencing Payment Terms

Country-specific Regulations And Risk Levels

The political, economic, and legal security of the trade partners can have a big effect on the payment terms that are chosen. One example is countries with unstable governments or weak financial systems, which might make traders ask for payment ahead of time or rely on safe ways like letters of credit.

Nature Of The Goods Or Services Being Traded

The terms of payment depend on the good or service being sold. For example, goods that go bad quickly might need shorter payment terms to lower risks. On the other hand, tools or capital goods, which are more valuable and have longer sales cycles, might have more flexible terms.

Financial Health And Relationship Between The Parties

Both the buyer and the seller must have stable finances. If you're in a long-term relationship with someone financially stable, you may be more likely to use more flexible payment terms, like open accounts or exchange sales. On the other hand, tighter terms may be needed if one party has a history of not paying or is in a bad financial spot.