Some knowledge of the important payment terms and methods of effecting payment would be useful to understand the export financing methods and process. The credit requirements of the exporter depend to a very large extent on the sales terms.
A sale contract should clearly specify when the payment will be made, where it will be made and how it will be made. As the payment terms are determined on the basis on the specific circumstances of the particular buyer and seller, it would be difficult to make any generalization about payment terms. However, there are certain standard terms, which are in common use.
Cash In Advance:
The most advantageous payment terms from the sellerâ€™s point of view is the remittance with the order, or sometimes, before the shipment of goods. The remittance may be made by draft, check, mail or telegraghic transfer. Very seldom is an importer prepared to make cash payments in advance, but in certain cases it becomes necessary. For instance, advance payment may be insisted upon when goods ordered are those manufactured to order in accordance with the specifications of the buyer. Further, when the buyer is unknown to the seller of his creditworthiness is doubtful, the seller would like to get the payment in advance.
If the seller enjoys a monopoly positions or if there is a sellerâ€™s market, it is easy to obtain advance payment; but when the market is very competitive, it is very difficult to do so.
Under trading on open account, the exporter ships the goods with no financial documents to his advantage except the commercial in voice. Under this method, therefore, the seller carries the entire financial burden with little or no documentary evidence. Because of the great risks associated with the open account Method, it is generally restricted to cases of transactions between interconnected companies, or where the exporter and overseas buyers have had a long and well established commercial relationship, and when there are no exchange restrictions that complicate the settlement. Indian exporters are allowed to sell abroad on the open account basis only with permission of the Reserve Bank of India. Normally, this permission is given only to foreign companies operating in India.
Under the consignment sale, the exporter consigns the goods to his agent or representative in the foreign markets, who arranges for the sales of the goods and takes payments to the exporter. Goods cosigned abroard include tea, coffee, wool, etc., which cannot be easily standardized. Under this method, the exporter retains the title to the goods until the sale of the goods is affected in the foreign market. The consignment sales involve a number of risks for the exporter. As bill of exchange is involved under this method, the seller is not protected against default. He is also exposed to such risks as exchange fluctuation and the loss that may arise if the consignee is inefficient or is not sincere and honest.
An Indian exporter selling goods on consignment basis must furnish a declaration regarding the full export value of the goods or, if the full export of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in the overseas market.
Documents against payment:
Under the D/P also known as cash against documents (c.a.d), the exporter ships goods to the foreign buyer, but the documents giving title to the goods will be handed over to the buyer through the bank only on payment. Under this type of transaction, until and unless the buyer makes the payment, the ownership of the goods remains with the seller.
The exporter may obtain finance from bank against D/P bills. If the bank is satisfied, it may finance the exporter by purchasing the D/P bills, usually on a with recourse basis, so that, in the event of nonpayment by the drawee, the bank has recourse to the drawer.
Documents on Acceptance:
Under the D/A method, the documents and the title to the goods are handed over to the buyer when he accepts the bills of exchange by signing it. The usance of the bill of exchange may be 30 days, 60 days or 90 days. The exporter thus extends credit to the importer for such period. Under the D/A terms, the exporter relies on the honesty and creditworthiness of the buyer; and, therefore, this facility is normally extended only to parties who have proven business integrity and financial standing. Banks may extend finance to exporters by purchasing the D/A bills with recourse.
Documentary Letter of credit:
The documentary letter of credit covers the major part of the export business of the world. A letter of credit is a document containing the guarantee of a bank to honor drafts on it by an exporter, under certain conditions and up to certain amounts. Instead of being drawn on the importer, the draft is drawn on the importerâ€™s bank. A letter of credit eliminates the risk for an exporter, for he will be definitely paid for his shipment provided, of course, that he fulfils his obligation. He, therefore, ordinarily requests the importer to arrange for a letter of credit. Apart from avoiding the risk of non-payment, an important advantage of a documentary letter of credit from the point of view of the exporter is that, immediately after the shipment of the goods, he can present the bill of exchange and other relevant documents and obtain payment from a bank at his own centre.
We have outlined above the important payment terms. The actual payment term adopted in a particular transaction is influenced by a number of factors, such as the individual circumstances of the buyer and the seller, the nature of the product, the profit margin, customs of the trade, the organization of the firm, the legal limitations and the cost and availability of credit.