International Financial Management

An import-export company payment mechanism

Introduction
When it comes to International trade, the buying and selling process can be prolonged and often
complicated. So, it’s understandable to feel relieved after concluding a sale with the other party and
agreeing on a price. But agreeing on a price is only one part of the payment process. You still need to
agree on how and when payment will be made. This is where payment terms come in.
In a global marketplace, it’s more important than ever for exporters to offer their customers attractive
sales terms supported by the appropriate payment methods
 There are many types of import-export company payment mechanisms like,
I. Cash-in-advance
II. Letters of Credit
III. Documentary Collection
IV. Open Account
V. Consignment

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 Cash-in-advance

 With Cash-in-advance payment terms, an exporter can avoid credit risk because payment is received
before the ownership of the goods is transferred.
For international sales, wire transfers and credit cards are the most commonly used cash-in-advance
options available to exporters. With the advancement of the Internet, escrow services are becoming
another cash-in-advance option for small export transactions.
 However, requiring payment in advance is the least attractive option for the buyer, because it creates
unfavorable cash flow.
Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus,
exporters who insist on this payment method as their sole manner of doing business may lose to
competitors who offer more attractive payment terms.

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 Cash-in-Advance
As an exporter, you can eliminate credit risk, or the risk of non-payment from foreign buyers,
with the cash-in-advance payment method. Cash-in-advance is the most secure method of
payment for the exporter because the importer pays the full or a significant amount of the
payment before the goods are shipped.
Payment is usually made via wire transfer, credit card, or escrow service. Cash-in-advance is
recommended in high-risk trade relationships or export markets, particularly for small export
transactions for which other payment methods may not be cost-effective. Cash-in-advance is also
less burdensome than a letter of credit and has less risk for the exporter than an open account.
However, requiring payment in advance is the least attractive option for the buyer. Exporters
who insist on cash-in-advance as their sole payment method for doing business may lose out to
competitors who are willing to offer more attractive payment terms. Depending on the sales
opportunity, an exporter may also need to consider other terms of payment.

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 Letter of Credit
Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is
a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that
the terms and conditions stated in the LC have been met, as verified through the presentation of all
required documents.
The buyer establishes credit and pays his or her bank to render this service. An LC is useful when
reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the
creditworthiness of the buyer’s foreign bank. An LC also protects the buyer since no payment obligation
arises until the goods have been shipped as promise
As a trade finance tool, Letters of Credit are designed to protect both exporters and importers. They can
help you win business with new clients in foreign markets. This means the exporter gets a guarantee of
payment while offering the importer reasonable payment terms.

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 How to Apply for a Letter of Credit

1. The exporter and their bank must be satisfied with the creditworthiness of the importer’s bank. Once the
Sales Agreement is completed, the importer applies to their bank to open a Letter of Credit in favor of the
exporter.
2. The Importer’s bank drafts the Letter of Credit using the Sales Agreement terms and conditions and
transmits it to the exporter’s bank. The exporter’s bank reviews and approves the Letter of Credit and sends
it to the exporter.
3. The exporter ships the goods in the manner provided for in the letter of credit and submits the required
documents to their bank. A freight forwarder may be used to assist in this process.
4. The Exporter’s bank checks the documents for compliance with the Letter of Credit terms and conditions.
Any document errors and discrepancies must be amended and resubmitted. After approval, the exporter’s
bank submits the complying documents to the importer’s bank.
5. The importer’s bank releases payment to the exporter’s bank. The importer’s account is and their bank
releases the documents to the importer to claim the goods and clear customs.

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 Documentary Collection
 The Documentary Collections payment method is an approach used for merchandise and
commodity exports.
Generally recommended in situations where there is an established and ongoing trade
relationship with a trusted buyer, this method can simplify your export transaction, offer faster
payment, and reduce costs when compared to Letters of Credit.
In a Documentary Collections transaction, the exporter’s and the importer’s banks facilitate the
export sale by exchanging shipping documents for payment.
However, the banks do not verify that the documents are accurate and do not guarantee
payment as they do with Letters of Credit. As a result, Documentary Collections are only
recommended for established trade relationships in economically and politically stable markets.

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How the Documentary Collections Payment Method Works

1. Both the exporter and importer agree to a documentary collection for payment in the sales agreement.
2. The exporter prepared a Bill of Exchange and sends it to their banks for forwarding to the importer’s
bank.
3. The Bill of Exchange - also known as a draft - provides instructions to the bank about the required
documents, payment amount due, the terms of payment, and when title transfers for the goods.
4. The importer’s bank releases the documents according to one of two options specified in the bill of
exchange, outlined below:+ Release of documents upon receipt from the importer of full payment,+
Release of documents upon receipt of the importer’s signed acceptance of the terms that commit to
future payment.
5. The importer uses the documents to clear the goods through the foreign customs agency.
6. The importer’s bank forwards the importer’s payment back to the exporter’s bank account.
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Open account
Open account payment in International Trade, the buyer receives the goods shipped by the exporter and
then makes the payment at the end of an agreed credit period.
The credit period can be a fixed duration – 30 days, 60 days, 90 days, etc. There is a gap between the
date of receipt of the purchase order and the date of receipt of payment, with activities like production
and shipping to be concluded in between.
The time gap involved in this method puts a burden on the working capital situation of the exporter.
Nevertheless, the exporter may choose to opt for this payment method if the importer is a strong player
with prospects of high volumes in the future.
 An exporter may also agree to an open account payment mode if there is a trusted relationship between
the two parties, or if the amount of money at stake is negligible.

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 Consignment
 Consignment in International trade is a variation of an open account in which payment is sent to the
exporter only after the goods have been sold by the foreign distributor to the end customer.
An International consignment transaction is based on a contractual arrangement in which the foreign
distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they
are sold. Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment
and its goods are in a foreign country in the hands of an independent distributor or agent.
 Consignment helps exporters become more competitive on the basis of better availability and faster
delivery of goods.
The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign
distributor or a third-party logistics provider. Appropriate insurance should be in place to cover consigned
goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment.
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 Other methods
EXIM BANK(Export-Import Bank of the United States)
The Export-Import Bank of the United States (EXIM Bank) is the official export credit agency
of the United States. Its mission is to ensure that U.S. companies of all sizes have access to the
financing they need to turn export opportunities into sales. The EXIM Bank’s aim is to help
American businesses export fearlessly and make sure they get paid.
 There are many other methods for an import-export company payment mechanism like,
I. Bank draft & transmittal letter
II. Uniform customs a practice documentary credits
III. Telegraphic transfer, etc,

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Thank You

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