The following methods of payment are available for export:
Advance Payment
It is the safest payment option where the importer sends the
payment in advance to the exporter either through TT (Telegraphic
Transfer) or through a cheque or demand draft. This is normally
done after acceptance of the order by the exporter.
3.
Open Account
This is an arrangement between the buyer and the exporter where
goods are shipped without the guarantee of payments. Both the
parties agree on sales terms but no documentary evidence is
created. The odds are heavily loaded in the favour of the importer
as the payment will be released at a later date. The accounts
between the exporter and buyer are settled periodically. Chances of
default or delay in payment are very high under this system. The
exporter must deal with only trustworthy buyers under this
scheme.
4.
Consignment Sales
Under this method, goods are shipped by the exporter but he
transfers the ownership to the importer only when the goods are
actually sold. This means that the entire risk here is borne by the
exporter. If the importer is unable to find an actual buyer, the
exporter is stuck with the unsold goods and he can not claim
payment for the same from the importer.
5.
Documents against Acceptance (D/A)
This system is based on documents and thus falls under the
category of documentary credit. The exporter does not want to part
with the ownership of goods unless he is certain about the receipt
of payment of the same. The importer, on the other land, does not
want to pay, unless he is sure about the receipt of goods. Banks
function as intermediaries, providing assurance to both the parties
on the other's behalf and use documents as a tool for this
assurance.
Under the D/A method, the exporter sends the shipment documents
along with the draft (bill of exchange) through his bank to the
importer's bank that gets the draft accepted by the importer before
handing him over the title documents.
6.
Documents against Payment (D/P)
Like in D/A arrangement, here too the documents are sent to the
buyer's bank with a draft (bill of exchange). However, this draft
is a sight draft and not a usance draft. This draft has to be paid
immediately on sight and only after the receipt of payment the
shipment title documents are released. It means that the importer
gets possession of the ownership documents of the shipment only
after making payment for the same. The exporter, on the other hand,
releases possession of shipment title papers only against the
receipt of payment. No credit is involved here.
7.
Letter of Credit (LC)
A letter of credit is a very popular form of documentary
credit. In fact, majority of international business transactions
use LCs. The letter of credit is a letter established by the
importer through his bank to the benefit of the exporter promising
payment of drafts drawn against this letter if the exporter
complies with the specific conditions prescribed in the LC. The
conditions are usually the same as stipulated in the purchase order
or export contract. LC acts as a substitution of the importer's
promise to that of his bank's to the exporter to honour its
commitment to pay for the export bills provided all conditions are
satisfied. In this way, a letter of credit works as an independent
contract between the exporter (designated beneficiary) and the
issuing bank.
8.
Benefits of LCs
To Exporters
LC minimizes the credit risk provided the issuing bank is
reputed and carries a sound track record.
LC eliminates risk of payment delays due to uncertain factors
like political instability.
LC affords financing for the exporter.
The exporter is bound to ship by a certain date as per the LC,
failing which the order will stand cancelled.
LC minimizes uncertainty and provides a clear picture to the
exporter regarding all the requirements for payments.
Cont.
9.
To Importers
He is in a position to ask for better prices and faster
deliveries.
Use of LCs will attract a large number of good suppliers
offering the importer a lot of choice.
The importer is assured of timely shipment of the specified
quality and quantity of ordered merchandise.
The importer can refuse payment if he finds any and even a very
minor mistake/oversight in any of the required documents.
Importer's risk of losing money in case the supplier is unable
or unwilling to effect a proper shipment is totally
eliminated.
10.
Types of LCs
Documentary and Clean LCs
Revocable and Irrevocable LCs
Confirmed and Unconfirmed LCs
11.
Special LCs
Revolving LCs
Transferable LCs
Back-to-Back LCs
12.
Useful Tips to Exporters regarding LCs
Always go for an irrevocable, confirmed LC issued by a prime
bank.
Ensure that the LC is transferable and allows
transshipments.
Before the LC is actually opened, please ask the importer to
fax you a draft.
The exporter must also show this draft to his banker and the
C&F agent to make sure that no unusual conditions are present
and that everything is in order.
This exercise is important because any change in an LC (known
as Amendment) once it is established, is very difficult to make and
carries high bank charges at the buyer's end.