Introduction

Getting paid for your exports in an accurate and timely manner is naturally a very important part of the export process. While there are some other payment methods associated with exporting, the most common types remain: cash in advance; open account; the use of documentary collections, such as sight and time drafts; and export letters of credit, which also may be implemented on a sight or time basis. Most other payments are derived from these fundamental building blocks of export payments and collections.

Each of these payment methods has certain risks and costs associated with them, which are often the responsibility of the exporter. These costs need to be analyzed, evaluated, and negotiated in advance of the shipment, so that you can price your product accordingly and satisfy both your own and your buyer’s requirements.

At a minimum, the payment terms that you decide upon should take the following factors into account:

1. The country risk of the buyer. The buyer’s country has ultimate control over the exchange and release of dollars, which of course is what you expect to receive in exchange for your goods. Many developing nations implement import regulations and exchange control mechanisms that can make payment in a hard currency like the dollar difficult at times. This is because they like to retain certain minimums of hard currencies, like the dollar, to be able to pay off foreign debts and obtain other financing.

   In addition, the economic and political instability of a country, or a poor trade relationship with the United States, could slow or impede your payment. Proper market research on the buyer’s country, and advice from trade professionals, should help you determine which payment mechanism to use. Our major trading partners, such as Europe, Canada, and Japan, generally have much freer access to dollars, making payment much smoother. That doesn’t mean you should avoid the other countries, but that you should be prepared to get more involved in the payment process. 
   

2. The buyer’s banks reputation. If the payment is by a Letter of Credit, a draft with the bank as the drawee, or any other method where the buyer or buyer’s bank is obligated to pay you, their reputation and financial stability is an issue. Again, proper research done on the buyer’s bank, and advice from your own international banker, can help you decide whether or not to work with them. Occasionally, an exporter’s strategy includes requiring the buyer to use a bank recommended by your own bank in order to complete the transaction.
   
   
3. The credit worthiness of the buyer. In many cases, international credit reports on foreign firms are vague, difficult to obtain, too expensive, or non-existent. For this reason you should ask for both trade and financial references in your potential distributor evaluation form, and insist on adequate credit and credit history before ever selling on open account. If the buyer has good credit, they usually are readily able to provide it.
   
   
4. The competition. It is difficult to compete for foreign business if others interested in selling similar merchandise are offering more favorable credit terms. Naturally, most importers are interested in obtaining open account status if they can. This means that their government is allowing them to pay you in dollars, and there are few import restrictions. If the business is promising and you can properly insure your receivable, you might consider it, but if there is any doubt in your mind about the risk of non-payment, you might hold your ground or even pass on the business. If the buyer is particularly interested in your products, they might agree to your terms over the competition. Your international bank can be of great assistance in guiding you in these types of decisions.
   
   
5. The volume and value of the shipment. In most cases, the larger the shipment, the higher the value. That means most of the costs associated in exporting the goods are also more expensive. Lower value shipments that are less expensive to ship may call for a more lenient credit position, such as open account or use of a draft. If delayed payment of a high value receivable is going to have an adverse effect on your daily operations, you should carefully consider asking for cash in advance, or at least partial prepayment of the goods.