Terms of payment

Terms of Payment

When an  international trade relation has been established between two parties, appear the risk of non payment, and it is bigger than in a domestic trade relation.
The risk could be non payment by the importer or the unfulfillment by the exporter.
That is why the parties should establish a method of payment and take in account some information about the other party before the cargo shipment, in order to avoid non payment or unfulfillment.

There are some issues that you must know and analize in an international trade relation:

Credit information

The credit information is usually much less in the foreign market than in the domestic.
Some improvements have been made currently, like the creation of centralized credit information portals, where you can look for this information in the each country agency.

Personal contact

The international trade relation lacks of personal contact, the comunication is usually through fax, telex and internet.
The exporter can not evaluate the importer's character and the understanding is more difficult.   

there are four traditional terms of payment:

Cash in Advance

The exporter requests that the customer provide payment in advance, before the shipment of the cargo has been done. Payment is usually made with an electronic SWIFT (Society for Worldwide Interbank Financial Telecommunication) fund transfer from the customer's bank to the exporter's bank to pay him in its own currency.
This method is a "risk-free" alternative for the exporter, he will not ship the goods until the buyer has remitted payment to him; The risk is completely transferred to the importer, who is expecting the shipment of the requested goods, in the specified quantities, in due time and with the documents necessary to clear customs in the importing country.
It is recommended to use with a "new" customer or someone with unknown creditworthiness, and for customers who live in countries in wich fraud is common.  



Open Account

Credit extended that is not supported by a note, mortage, or other formal written evidence of indebtedness.
the exporter just sends an invoice to the importer along with the shipment and trusts the customer to pay within a reasonable amount of time (30 to 90 days).
the exporter assume all the risk, and that's why it should be only to established customers, or customers with whom the exporter expects to have an ongoing relationship, or possibly to new orders with known credit data and whose credit rating is excellent.

Letter of Credit

The letter of credit is an instrument issued by a Bank on behalf of the importer (buyer) promising to pay the exporter (beneficiary) upon presentation of shipping documents in compliance with the terms stipulated therein. The Bank is obligated to pay only if the documents are in order.

• The Exporter and the Importer agree on work under letter of credit terms. The Exporter sends a pro-forma invoice to the Importer.
• The Importer takes the pro-forma invoice to its Bank and requests a letter of credit.
• The Importer's Bank issues a letter of credit and sends it to the Exporter's Bank.
• The Exporter's bank advises the letter of credit and notifies the Exporter that it is OK to ship the merchandise to the Importer.