Financing Exports - Arranging Your Payment Terms

Arranging Your Payment Terms

Getting paid is proof of success in exporting. The best proof of all is getting paid promptly. Exporters who have to wait unduly for payment are the ones who suffer a loss of project.

Specialized expertise is required for an exporting venture. There are a number of factors affecting export payments that do not usually apply to domestic sales. These affect the time it takes to receive payment, which in turn may affect your financing of your export program.

Be aware that exporting involves additional distance and time between you and your market, your transactions involve more than one currency and legal system, and Canadian banks do not formally finance foreign receivable (except from the United States). Consider the following methods of payment:

Cash In Advance (Prepayment)

When the customer pays cash in advance, the exporter receives a partial or full payment before the goods are exported. This method is risk free to the exporter but extremely risky for the importer. It is normally only used in paying for goods or services that are scarce and in high demand.

Bills of Exchange and Drafts

These are documents handled by the chartered banks that state the total value of the goods exported and the date of payment. They are addressed to the importer and require payment on demand–or on a fixed or "to be determined" date–a specified amount of money to, or to the order of, a specified person.The title to the goods is not transferred until the payment is made. There are two types of drafts: a sight draft and a time draft. A sight draft requires a customer to pay at sight, i.e., on receipt, while a time draft is for a specified time after receipt.

Letters of Credit

Letters of credit are the most common method of payment in international trade as they provide protection to both parties involved in the transaction. They are issued by the international department of a chartered bank, usually that of the exporter and state all the terms and conditions that the exporter must meet before collecting the specified amount. If the conditions are met, the bank promises to pay the exporter. Letters of credit specify the documentation needed for customs clearance as well as details of any other terms associated with the sale (e.g., packaging changes or translated literature).

A letter of credit may be revocable or irrevocable. Irrevocable letters of credit are preferable because they cannot be canceled unilaterally and therefore greatly reduce the risk of non-payment. The exporter can also ask the bank that will be transferring the funds, usually the exporter's own bank, to confirm the letter of credit. This means that the bank guarantees payment upon the fulfillment of the terms of the agreement by the exporter. This confirmation provides additional assurance that the exporter will be paid.

Open Account Trading

This method is primarily used between companies that have a long-standing trusting relationship or when billing within the same firm. It is also common in transactions between Canada and the United States. Trading an open account consists of issuing invoices once the goods have been shipped, exactly as is done in domestic transactions. With this method, the exporter assumes all of the risks and because of the absence of any negotiable instrument to document the sale, collection difficulties can occur if the customer refuses to pay.

Consignment

When goods or services are sold on consignment, the exporter retains ownership until they are sold. The seller is responsible for the financial burden and risks (i.e., risk of default and damage to goods). This method of payment is usually only used for goods that are risky or not very popular.

Countertrade and Barter

Countertrade is a trading arrangement in which a sale to an importer is conditional on a reciprocal purchase by the exporter. Instead of being paid in cash for a shipment, the exporter would receive products (or even certain kinds of services) from the target market.

The governments of developing countries often require trade deals to include countertrade arrangements because countertrade enables them to protect foreign exchange reserves; create new exports or markets; balance trade for economic or political reasons; or acquire new technology.

Barter, or payment in kind, is the most basic form of countertrade. It involves the mutual exchange of goods and services between two or more parties. For example, two state-owned trading companies could agree to a quantity of sugar for a quantity of oil deemed to be of equal value.

Because trading without the exchange of money is a difficult business, Canadian companies seldom engage in international barter. Successful resolution of these challenges depends on careful analysis, experience in global markets and, quite often, good luck. For the trade practitioner just starting out, the best course is to seek assistance from those who have experience in barter deals and learn from them.