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International Payment Terms

International Payment Terms

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Published by Vasant Kothari

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Published by: Vasant Kothari on May 30, 2011
Copyright:Attribution Non-commercial


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 AppArel exports
 APPAREL May 2011
After a detailed evaluation of thedifference between export costingand pricing,Vasant Kotharigives aninsight into the export price calculationmethods. These nuances are likelyto benefit apparel manufacturers/exporters in the long run.
n exporter may negotiate excellentterms and perorm an outstandingdeal, but i he is not paid, the dealis lost. o succeed in today’s globalmarketplace and win sales againstoreign competitors, exporters mustoer their customers attractive salesterms supported by appropriate payment methods. Getting paid inull and on time is the ultimate goal o every export sale.
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APPAREL May 2011
If the exporter A 
pproprIAtely selects AnD ArrAnges thepAyment terms, he cAnsIgnIfIcAntly mInImIsethe rIsks InvolveD wIthpAyments...
It is thereore important to setup the right terms o trade beorethe transaction is carried out. I the exporter appropriately selectsand arranges the payment terms,he can signicantly minimise therisks involved with payments whileaccommodating the needs o the buyer.
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Payment methods
Tere are many ways to make andreceive payments in international trade.Due to the physical distance betweenthe buyer and the seller, and the actthat the transaction may have taken place without the two parties actually meeting, both are keen on minimisingthe risk in payment transaction. Tebuyer wants to make sure he receivesthe order in acceptable conditions andon time, and the seller needs to know that he will get paid or it on schedule. When negotiating the terms o  payment, an exporter always acestwo dilemmas:- i the exporter insists on moresecured payment terms, there is achance o lesser sales opportunities(lower and less requent orders,allowing competitors with betterterms to take the advantage),- i the exporter agrees on moreexible payment terms, he runs therisk o the payment being delayed.
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APPAREL May 2011
 When to use Cash-in-Advance erms:
has a less-established operating history 
doubtul, unsatisactory or unveriable
the importer’s home country are high
available elsewhere, or is in heavy demand
Letters of Credit
Letters o credit (LC) are one o themost secure instruments availableto international traders. LC is acommitment by a bank on behal o thebuyer that payment will be made to theexporter, provided that the terms andconditions stated in the LC have beenmet, as veried through the presentationo all required documents. LC is useul when reliable credit inormation abouta oreign buyer is difcult to obtain,but the exporter is satised with thecreditworthiness o the buyer’s oreignbank. LC also protects the buyer becauseno payment obligation arises until thegoods have been shipped or deliveredas promised. Letters o Credit deal indocuments, not goods. Tus, the process works both in avour o both the buyerand the seller.Tere are our primary methods o  payment or international transactions.During or beore contract negotiations,the exporter and importer shouldnalise the best method, which ismutually desirable.1. Cash in Advance2. Letter o Credit3. Documentary Collection4. Open Account
Cash in advanCe
 With cash-in-advance payment terms,the exporter can avoid credit risk because payment is received beore theownership o the goods is transerred. Wire transers and credit cards are themost commonly used cash-in-advanceoptions available to exporters. However,requiring payment in advance is theleast attractive option or the buyer,because it creates cash-ow problems.Foreign buyers are also concerned thatthe goods may not be sent i payment ismade in advance. Tus, exporters whoinsist on this payment method as theirsole manner o doing business may loseto competitors who oer more attractive payment terms.
 APPAREL May 2011
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