Methods of payment
With export financing, the exporter can go to his bank with the export contract and ask for a loan or an overdraft. The bank will take into consideration the exporting company’s financial status and its ability to carry out the order. The loan will be paid back with interest.
With factoring, the exporter sells his invoice for less than the total amount to the factor, which is usually a group of banks or insurance companies or private factoring companies. The factor then collects the full amount from the debtor (the importer). Depending on the terms of the contract the factor may operate with or without recourse.
Leasing refers to the ‘rental’ of capital goods and consumer durables such as commercial vehicles, IT systems and construction plant equipment. The international leasing company, which may be a bank or other financial institution, pays the exporting company in advance for the goods. The ownership of the goods then passes to the leasing company which leases the goods to the importer on a medium or long-term agreement.
In international trade payment, by cheque usually occurs in small orders. The exporter should wait until the cheque has been cleared before shipping the goods. International clearing of cheques usually takes three to four weeks. Many banks now offer a lock box service for payments made by cheque. Cheques are sent to a post office box number, collected by a bank in the importer’s country, which transfers the amount to the exporter’s account in his own country. The lock box system cuts out the lengthy procedures of posting cheques to international destinations and clearing international cheques.
Credit cards are issued by companies that guarantee payment for the goods and services that the cardholder buys. The cost is charged to the cardholder’s account and paid the following month, when a statement that lists all the transactions is sent to the cardholder. Because of the serious risk of fraud, credit cards are only used in international trade for small orders.
A bank transfer is an irrevocable and unconditional order of
payment issued by the debtor’s bank to a correspondent bank in the creditor’s
Bill of Exchange
The Bill of Exchange, or bank draft, is a document that orders a bank to pay a sum of money on demand or on a certain date to the company specified. There are three parties involved:
Cash with order (CWO)
Cash With Order is the safest method of payment for the
exporter. The importer pays for the goods when placing the order and then waits
for the exporter to fill the order and ship the goods. Problems may arise if the
goods that are delivered are late or do not correspond to the description agreed
in the contract of sale. CWO is only used for small purchases
Cash on delivery (COD)
With Cash On Delivery the goods are delivered to the importer at the exporter’s expense, together with an invoice. The importer pays the invoice when the goods arrive. COD is quite widely used in trade within the EU where goods are delivered by lorry. COD saves time as it does not involve lengthy procedures involving banks located in different countries. It does, however, involve some risk for the exporter, who, after he has delivered the goods, may discover that the payment has not effectively been made.
The Open Account is the least secure means of foreign sales
for the exporter and is usually reserved for regular, reliable customers. The
exporter delivers the goods without any pre-payment or
Documentary or Cash Against Documents (CAD)
In a case where the exporter is confident about the
relationship with the buyer,
The D/P procedure operates as follows:
D/A involves a Bill of Exchange on which payment is due at a future date. The buyer accepts the exporter’s Bill of Exchange and the documents are handed over. It operates as follows:
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