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Frequently
Asked Questions |
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- What are the export payment methods and options?
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- The following payment methods are in the order of Low
risk to High Risk for the Exporter.
Pre-payment. You ask your buyer to pay
you in advance. While this greatly limits your risks, it
exposes the buyer to increased risks. This is because the
buyer has to pay cash in advance and has to totally trust
you to deliver quality products on time.
Documentary credits. -
- You negotiate with
the buyer to have their bank establish an ‘Irrevocable
Documentary Letter of Credit’. Make sure you get the
letter of credit before your production stage, but
definitely before you ship your products. Ensure the
letter of credit reflects the agreement you made with your
buyer. You may want to have your letter of credit
confirmed (guaranteed) by an Indian bank or take out
export credit insurance.
Once your products are shipped, lodge all the necessary
documents with your bank. The bank will check that the
documents meet the requirements in your letter of credit.
Your documents must be in strict accordance with the
letter of credit, otherwise your bank will not be able to
claim payment from the issuing bank. Your bank will credit
your account when they receive the funds from overseas. If
an Indian bank does not confirm your letter of credit
and you do not have export credit insurance, you will have
foreign bank risk and country risk and possibly currency
risk.
Letters of credit are almost invariably issued in strict
accordance with International Chamber of Commerce rules.
Documentary collections.-
- You produce and
ship the goods. You pass all the necessary documents to
your bank, along with a 'draft' or 'bill of exchange'
drawn on your buyer. Your bank will pass these on to their
agent bank in the buyer's country. If the draft is drawn
'at sight' or 'on demand', that bank will release the
documents (and therefore title to the goods) once the
buyer makes their payment. If the draft is drawn to mature
at some future time, such as '60 days after sight', the
buyer will accept the bill of exchange agreeing to make
the payment at an agreed, future date. Using documentary
collections, you will still have some buyer credit risk,
country risk and possibly currency risk.
Collections are governed by International Chamber of
Commerce rules. There are two main types of documentary
collections: a) Documents against payment and b) Documents
against acceptance. The latter is more risky than the
former.
Open account.-
- You expect payment after
you send the goods, an invoice and other documents like a
bill of lading to your buyer. However, the buyer can
receive the goods and not pay you, leaving you totally
exposed to buyer credit risk, and possible country and
currency risk. However Export Credit Insurance may
protect you from non payment.
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Credit risk, insurance and background checks.
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- To
protect yourself against payment default, it is prudent to
use payment methods such as irrevocable letters of credit
etc. Your bank will be able to provide advice on payment
options and their relative advantages. Banks can also
advise on ways in which you can protect yourself against
changes in currency relativities as international trading
exposes you to foreign exchange risks.
If your buyer requests for an Open Account, Export Credit
Insurance may protect you from non payment.
For a comprehensive export guide, you can purchase The Export Handbook.
The handbook takes you through the practical aspects of exporting essential for both experienced and novice exporters. It covers Export Procedures and Documentation, Customs Export Regulations, Internet Commerce, Banking and Finance, Export Risk and Credit Insurance, Marine Insurance, Shipping and Air Cargo, Freight Forwarding, Export Packaging and Resources for International Trade.
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