TERMS of PAYMENT

EXPORT IMPORT MANAGEMENT

 Terms of Payment

● One of the greatest concerns an exporting company has is to make sure that it will
be able to collect payment from its foreign customers. Although this is also a
legitimate concern domestically, an international transaction is generally perceived
to involve a much greater non-payment risk than a strictly domestic sale for many
reasons.

● It is a common misconception that there is some sort of an international court of

justice; although the International Court in the Hague (the Netherlands) arbitrates
disputes between two governments and between governments and multinational
corporations, it never interferes in disputes between corporations. In addition, its
rulings are non-binding, as the Court does not have the executive authority to
enforce them.

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 Terms of Payment (cont.)

● Risks in International Trade:

● There are three sources of risks in international trade that need to be

considered. First is obviously the commercial risk, which is also
encountered in domestic transactions, and that relates to the ability of the
importer to pay the invoice in time. However, there is also the country
risk that encompasses all of the issues related to the country to which an
exporter is shipping and that may affect payment, regardless of the
creditworthiness of the importer. Finally, exporters also associate risk
with exposure, which is the potential financial impact of non-payment or
reduced payment on the exporter's business.

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 Terms of Payment (cont.)
● Country Risk: Country risk is made up of an aggregate of different issues, some political, and some strictly economical.
● On the political side, the government's stability should be considered. A government change would mean a change in import
policies, , which, in turn, could mean that goods cannot clear Customs as easily, or that tariffs increase, or that other policies
are changed to such an extent that the importer will refuse delivery. Similarly, a government that is in a weak position could
also see its policies challenged by a strong public opposition, a situation that can lead to strong political unrest, as was seen
in France in late 1995 when the country was essentially paralyzed by strikes for several weeks.
● Port personnel or other personnel critical to the timeliness of a shipment—such as Customs officers—strike often in some
countries, and this fact should be factored in the decision of the terms of payment.
● Secondly, the overall health of the economy should also be considered. If there is high unemployment, policies against
"job-stealing imports" could be implemented. Moreover, the balance of payments of the importing country may also be
relevant: If it is badly in a deficit position, imports of "non-essential" goods could be curtailed.
● Finally, a quick survey of the social system of the country could be conducted. Some countries' societies foster a climate
where fraud is commonplace, sometimes prevalent (e.g., Nigeria) or litigation procedures might be too slow. In India, for
example, a judgment is generally not rendered for at least ten years.

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 Terms of Payment (cont.)
● An Example About the Country Risk

Source: The magazin World Trade

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 Terms of Payment (cont.)

● There are a number of ways in which an exporting company can ensure it

will get paid and be paid on time; a company can always tailor its
international terms of payment to

○ the characteristics of its customers (the commercial risk),

○ the countries in which it does business (the country risk), and

○ its own tolerance for risk (exposure).

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 Terms of Payment (cont.)

● What is difficult in choosing an international term of trade is managing the

delicate balance between protecting the interests of the exporter and
offering good marketing practices that will engender good customer
relations.

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 Alternative Terms of Payment

● There are essentially four "traditional" methods to handle the issue of

payment in foreign transactions, all involving a different level of risk:

○ Cash in Advance (Advance Payment),

○ Open Account (Cash Against Goods),

○ Documentary Collection (Payment Against Documents), and

○ Letters of Credit.

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Advantages and Disadvantages of Several Terms of
Payment

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Cash in Advance
 Cash in Advance
(Advance payment - Prepayment - Down payment)
● In a Cash in Advance transaction, the exporter requests that the
customer provide payment in advance, before shipment of the
goods can take place. Payment is usually made with an electronic
SWIFT (Society for Worldwide Interbank Financial
Telecommunication) fund transfer from the customer's bank to the
(1) Money
exporter's bank but the importer himself, his agent or a third party
Exporte BANK
who acts on his behalf might also make the payment.Importe
r (2) Goods
r

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 Cash in Advance (cont.)

● This is the ultimate "risk-free" alternative for the exporter. In a Cash in Advance transaction, the
risk is completely transferred to the importer. It sends cash to the exporter with the expectation
that the exporter will ship the goods that were requested, in the quantity that was ordered, in due
time, and with the documents necessary to clear Customs in the importing country. In addition, this
takes place in an atmosphere in which the exporter just demonstrated that it has no trust
whatsoever in the importer because it is requesting "Cash in Advance.“

● Cash in Advance is a recommended way of conducting international transactions in countries in

which fraud is rampant, in countries in which there is a substantial risk of political instability or the
possibility of foreign exchange "freezes," and in countries that do not have a convertible currency.

● However, this method is unsound for business conducted in developed countries and in countries
in which there is a significant level of sophistication in international business.

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 Open Account
(Cash against goods- T/T
Telegraphic transfer - Cash on
delivery (COD))
 Open Account (Cash Against Goods)

● In an Open Account transaction, the exporter conducts international

business in a manner similar to the way it conducts business domestically.
The exporter just sends an invoice to the importer along with the shipment
and trusts the customer to pay within a reasonable amount of time,
commensurate with the credit usually granted in the country in which the
importer operates, usually thirty to ninety days. It is essentially the
conceptual opposite of Cash in Advance, as the exporter shows complete
trust in the importer and ships the merchandise without any guarantee that it
will be paid. The only recourse in case of non-payment is legal action in the
importing country, a time-consuming and expensive process that exporters
rarely undertake.

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 Open Account (cont.)
(1) Goods +
(Drawer) Documents IMPORTE
(3) Money R (Drawee)
EXPORTE
R BANK
Banka kanalı ile
ödeme (2) Goods

CUSTOMS

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 Risks in Open Account
The buyer can cancel the order any time after giving the order and before receiving the goods.
The buyer can cancel the order after inspecting the goods during production.
The buyer may abstain from receiving the goods after the goods are delivered to the destination
port. In this case the freight and demurrage (a charge for undue detention in port of a vessel by
the shipowner, as in loading or unloading, beyond the time allowed or agreed upon) are paid by
the seller.
If the financial situation of the buyer worsens he may abstain from receiving the goods, taking
them through customs or making the payment.
The buyer may abstain from paying the taxes of the goods and seek help of the seller.
The buyer may refrain from payment after selling the goods.
The buyer may, after receiving the goods, deduct from the money transfer the small
reclamations he dedects or claims to detect.
The buyer, since he has the goods and documents at hand, pays the seller whenever he
pleases.
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 Open Account (cont.)

● This term of payment should be reserved to established customers, or

customers with whom the exporter expects to have an ongoing relationship.
It could possibly be extended to new orders from large companies and/or
companies for which commercial credit data is available, and whose credit
rating is excellent. At least, that's theoretically the way that this term of
payment should be used.

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 Open Account (cont.)
● In practice, however, this term of sale has become almost necessary in some markets if the exporter is to expect any
sales. For example, in the European Union, it has become very difficult to conduct business on any other basis. It is
to be expected that the trend will continue and expand to other markets as well: For example, European Union
companies offer Open Account terms of payment to 80 percent of their customers outside of the EU. The main
reason is that, historically, European exporters have often benefited from their government's support, and were often
offered free (or substantially discounted) commercial insurance (*) on their foreign receivables. Until 1994, for
example, a French exporter could obtain insurance from the COFACE—the Compagnie Française d'Assurance pour
le Commerce Extérieur, a government-run insurance company—at a greatly reduced cost; its risk of non-payment
had therefore essentially been assumed by the government. Today, COFACE and other European-based companies
constitute the largest providers of international commercialcredit insurance and are present in many different
countries, a position reached through many consolidations.

(*) commercial credit insurance (or credit insurance or commercial insurance): An insurance policy under which
commercial risk is covered; in exchange for a premium paid by the exporter, the insurance company will bear the risk
of nonpayment by the importer, deducting a slight percentage of the receivable.

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Risk Analysis of Open Account and Payment in Advance
in Comparison
Open Account Payment in Advance

Advantages to Exporter:
Advantages to Exporter:
•Assumes no risks
•None - but could increase the sale!
Disadvantages to Exporter:
Disadvantages to Exporter:
•None
•Assumes all risks
Advantages to Importer:
Advantages to Importer:
•None - but could secure low cost!
•Assumes no risks
Disadvantages to Importer:
•Delays use of company’s cash resources.
•Assumes all risks
Disadvantages to Importer: 19