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MANAGEMENT OF INTERNATIONAL TRADE PAYMENTS

LEARNING OBJECTIVES
Understanding importance of payments in export transactions
Selecting appropriate instrument of international payments
Understanding payment risk and selection of right method of
payment
Understanding of basics of advance payment method
Learning mechanism letter of credit method of payment
Understanding technical issues of banker collection method of
payment
Understanding of basics of open sale account methods for exporter
Learning basics of consignment method of payment
Learning payment risk for exporters and management techniques
Learning how select right method of payment to protect interest of
exporter

WHY EXPORT PAYMENT IS ESSENTIAL?

People do business for PROFITS. Same is the purpose when exporter


does business with foreign buyer. Foreign buyer normally resides
thousands of miles away from seller's home with different choices, rules,
regulations, traditions, language and laws etc. Biggest question mark in
export business is, WILL EXPORTER GET FULL PAYMENT ON DUE
DATE? Success in export business depends on managing the payment
risks.

It is very important decision to sell the goods to buyer on cash or credit


basis. By doing business on credit terms, exporter takes a decision to
transfer his owned or borrowed money/funds, to the buyer living in distant
foreign country. It is a serious decision. Giving credit period of 30days,
60days, 90days etc. to the foreign buyer may leads to a very high risk of
non-payment in export transaction.

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Delays or non-receipt of payment is not only increase the cost of doing
business but leads to the failure in export business. In export transaction,
there is always a time lag, between shipment of goods and receipt of
export payment. This time lag, increases the risk of delays or non-
payment. Any slackness in monitoring payment or casual approach
towards securing timely payments will lead to drastic financial results for
the exporter.

To ensure full and timely payment exporter has to select the right
instrument and method of international payment, so to, secure full and
final export payment from foreign buyers.

BEST INSRUMENT FOR INTERNATIONAL PAYMENT


As per FEMA (Foreign Exchange Management Act) international
payments must take place through banking channels within the prescribed
period presently 270 days from date of shipment. It is mandatory for
exporter, to bring back export payment within this period. In case of trade
transactions, it is always advisable to route payments through bank
branch of the exporter. Main instruments used are bank drafts, cheques,
credit cards, traveller cheques and wire transfer of funds etc. which may
be used for receiving small export payments. While using instrument of
international payment other than SWIFT, exporter must take
precaution to ship the goods only on receipt of payment by its bank.
Exporter must select SWIFT (Society for Worldwide Interbank
Telecommunication) payment system to get the export payments. Your
bank will help you to obtain payment through this computer based
standard international payments system. SWIFT IS THE STANDARD,
CHEAPEST, QUICK AND THE MOST SECURED INSTRUMENT FOR
INTERNATIONAL PAYMENTS.
So to get payment through SWIFT system. Exporter should make an
agreement with the importer, to conduct the payment through SWIFT
system by mentioning this condition, in invoice or the sale contract. To
facilitate payment exporter must give in advance the SWIFT code number
of the branch of the bank, along with requisite details of its bank account
to the importer.

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RISKS INVOVED IN INTERNATIONAL TRADE PAYMENTS
International payment are very risky and exporters should have proper
planning to protect them. Followings are the some of the main risks
involved in international trade payments:
- Commercial risk of non- payment by importer on due date.
- Political risk of importer country.
- Non delivery risk of not shipping right goods to importer.
- Cancellation of order by the importer.
- Delays in making payment by importer.
- Loss of goods during voyage.
- Bad debt risk causing total loss due to non- payment.
- Currency fluctuation risk due to change in exchange rate of invoice
foreign currency against INR.
Depending on the risk element in the payment transaction, we have
to select a particular or combination of methods of payment used in
international trade. In addition to the selection of right method of
payment, exporter must cover the credit payment risk in the payment
transaction by getting ECGC policy, before shipment of the goods.
Commercial and the political risks are covered by this policy by
paying the requisite premium by exporter to ECGC.
Each and every payment transaction must be monitored, to ensure timely
export payment. Cancellation of export order and delays in payment risks
can be covered by demanding L/C from the importer. When payment
becomes the bad debts the services of debt recovering agent in the
country of the importer may be used before going for expensive and time
consuming litigation. Transit risk is covered by taking marine insurance
policy. Lastly, the currency risk can be hedged with bank by taking the
right type of forex derivative. Cheap and best hedging derivative available
from your bank is the FORWARD CONTRACT.
It is also advisable that exporter should obtain confidential report on the
foreign buyer either through ECGC or Bank or DUN and BRADSTREET
before making shipment to the foreign buyer.
It must be noted that buyer will make from its sales, to local consumers.
Further, exporter should complete the delivery schedule, to help the
importer to supply the goods to its consumers as per its commitments. No
body borrows money to pay the creditors. Only sales realisation of
importer encourages the payments. Hence, now it has become

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essential for each and every exporter, to understand the business
model of the buyer and help him to grow. His growth will ensure long
term relationship and timely payments.
Avoid dispute in international trade payments. Resolution of disputes is
expensive and time consuming for the exporter. Exporter must treat
exports as long term business strategy with focus to help the importers, to
grow in their business.

VARIOUS METHODS USED FOR MAKING INTERNATIONAL TRADE


PAYMENTS
Success in exports mainly depends on the selection of right buyer with
good financial standing and integrity. Exporter must selection right buyer
with payment capacity. There after it has to select right method of
payment, in consonance with risk element involved in international
payment. Main methods of international payment or also referred as term
of payment are as follows:
- ADVANCE PAYMENT

- LETTER OF CREDIT

- BANK COLLECTION

- OPEN SALE ACCOUNT

- CONSIGNMENT SALE

ADVANCE PAYMENT- EXPORTS


Definition of advance payment is the receipt of the payment by the
exporter from the importer through banking channel before the date
of shipment of the goods. Exporter is allowed to get full or partial
advance payment of the export order.
This is the best method of payment for the exporter. In case of receipt of
full advance payment, there is no risk of non-payment for the exporter. It
is a dream method of payment for him. What is good for exporter may be
bad for the importer. Advance payment is very risky method of payment

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for the importer. In spite of making payment, there is no guarantee
that importer will get right quality and quantity of goods on time.
TRUST HAS TO BE ESTABLISHED IN THE MIND OF IMPORTER FOR
GETTING ADVANCE PAYMENT.
To get the advance payment, exporter has to create trust in the mind of
the importer, that it has the capacity and capability to supply quality goods
on time. There is no one formula for creating such trust. Each export
transaction is unique. Special approach has to be developed. Depending
on the merits of each case exporter has to create trust situation, so to get
the advance payment from importer.
Advance payments provides free or at low cost funds, to the exporter
to manufacture/arrange goods for export. In this case, exporter is
doing business with importer’s money. Foreign buyer provides the
working capital for the execution of export transaction. Best model
of doing export business.
QUANTUM OF ADVANCE PAYMENT TO BE RECEIVED FROM
FOREIGN BUYERS
NEW EXPORTER
As per existing RBI exchange control regulations, for new exporter, there
is no limit to receive the advance payment against order from importer,
through banking channels, with interest or without interest payment
liability. Full or partial amount say 20%, 40%, 50%, 60%, 80% etc. of
the export order can be received as advance payment.
Exporter has to ship the goods to importer, within 1 year from the date of
receipt of advance payment. This shipment commitment of the exporter is
monitored by the bank which receives advance payment for him. Further,
documents relating to this transaction has to be routed through advance
receiving bank for monitory that shipment has been completed within
stipulated period. In case an importer demands interest on the advanced
amount, it can be paid unto LIBOR+1% only.
ILLUSTRATION
Let us suppose that an exporter is dealing with State Bank of India New
Delhi. But advance payment has been received through PNB New Delhi.
Exporter should give the documents after shipment to SBI New Delhi with
instruction, to deliver them to PNB New Delhi for onward sending to the
foreign buyer. It is the duty of PNB, the advance payment receipt bank, to
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have control on the advance payment transaction, so that exporter
completes, the shipment within stipulated period of one year. Further,
exporter can return the advance payment within one year. After that, any
refund of the amount or to do shipment after one year, requires the
approval of RBI.
ESTABLISHED EXPORTER
Eligible exporters also doing profitable export business for the last three
years may receive advance payment without any amount restriction with
or without interest payment liability. In this case exporter is allowed to
make shipments of goods up to 10 years from the date of receipt of
advance payment. If advance payment amount is more than USD100
million, only in such case, bank has to inform RBI. Exporter must have
capacity and capability, to complete the shipments of orders. Exporter has
to use the advance payment only for producing or arranging the goods for
exports. In case, importer wants the interest on the amount of advance
payment, the exporter is allowed to pay interest up to LIBOR+2% p.a.

WHEN EXPORTER SHOULD ASK FOR ADVANCE PAYMENT TERM

Exporter may negotiation for advance payment with importer in following


cases:
- When importer is new in the business without good history and
experience.
- Credit worthiness is doubtful, unsatisfactory and business details are
not available.
- Political and commercial risks of buyer’s country are of very high
degree.
- Exported product is not easily available from other suppliers. Exporter
has the monopoly.
- Product is made to order and it is not commonly used by other buyers.
- Order amount is of low value.
- High technical export product which needs heavy investments.
- Exporter can demand full or partial advance payment depending on the
situation.
- Advance payment should be sent to exporter through SWIFT system.
Provide the details of the account and SWIFT code no of the branch of
the bank, to the buyer to enable him to remit the payment safely.
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ADVANTAGE OF ADVANCE PAYMENT FOR EXPORTER
- Safest and best payment method for exporter but risk for importer.
- Even partial advance payment is a guarantee that export order will not
be cancelled by the importer.
- Exporter will arrange goods with funds of the importer. No need to
arrange working capital by pre and post shipment finance from bank for
export activities. These fund will be interest free or with low cost interest.
- Best approach to do business with somebody else money. Tool to get
export incentives quickly from concerned agencies.
- No need to arrange credit report from rating agencies and ECGC policy.

DISADVANTAGES
- Insisting of advance payment may cause the exporter to lose customers
to its competitors who may offer better credit facility to the importers.
- Buyer of good standing may find the payment of cash, in advance
unacceptable to them because of insecurity of funds and financial burdens
to him.

LETTER OF CREDIT METHOD OF PAYMENT

UNDER L/C PAYMENT IS MADE BY IMPORTER BANK, ON BEHALF


OF IMPORTER, BASED ON PRESENTING THE RIGHT DOCUMENTS
AS REQUIRED/DEMANDED BY LETTER OF CREDIT BY THE
EXPORTER, TO THE NEGOTIATING BANK, IN IT’S COUNTRY.

Banks play very important role in arranging payment under letter of credit.
Payment to the exporter under L/C is not made by the importer but by it’s
bank. Bank makes payment to the exporter against presenting complying
documents either immediately or after some time (equivalent to the credit
period given by the exporter). L/C makes payment to exporter based on
the desired documents by it. L/C issuing bank recovers the ultimate
payment from the importer after the receipt of documents complying with
terms and conditions of L/C. Operationally letter of credit is very similar
to functions of bank credit card transaction.

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If the financial standing of issuing bank is unsatisfactory and
importer is residing in high political risk country, exporter must
demand L/C duly confirmed by exporter bank or any other Indian
bank of good rating/standing.

PAYMENT PROCEDURE UNDER L/C

L/C is initiated by the sale contract between exporter and importer. L/C is
created by mutual agreement of exporter and importer as one of
conditions of the sale contract. Further, it has to be opened/issued by the
importer bank on the specific request of the importer. Terms and
conditions of L/C along with the documents required to comply them
are decided by the importer as per the sale contract.

L/C is advised to exporter by the advising bank on the request of the


issuing bank. It charges nominal fee for advising L/C. Exporter must read
the L/C very carefully. Make sure that all the terms and conditions are as
per agreed sale contract. Secondly, exporter will be able to produce
documents to satisfy each term and condition of L/C. If exporter finds a
condition which was not as per sale contract or it will not be possible for
him, to arrange relative document required by L/C. In such cases ask for
amendment of L/C. Do not ship the goods without getting necessary
amendments.

Exporter has to present the complying set of documents after shipment,


to the nominated bank, duly arranged by the importer bank to get the
payment. L/C is either available with a particular nominated bank or with
any bank in exporter’s country. These instructions are clearly mentioned
in L/C. Exporter will get payment, in its own country against tendering
documents to the negotiating bank.
Under L/C, normally exporter gets payment from the nominated bank
and not from the foreign buyer. Issuing bank has to reimburse the
nominated bank which has made payment to the exporter based on
presenting complying documents. Ultimately, importer has to pay, to its
issuing bank and gets documents including bill of lading. It will get the
goods from the shipping company against surrender of bill of lading on
arrival of the ship in its country.

SUMMARY OF L/C PAYMENT


Under L/C Importer bank makes payment to exporter on behalf of the
importer. Basis of getting payment is the presentation of documents
by the exporter which satisfying each term and condition of L/C.
Terms/conditions of L/C and the requirement of documents are

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prescribed by importer, to ensure the receipt of quality goods on
time. L/C makes payment to exporter is based on submitting complying
documents to the bank. Exporter gets payment before importer takes the
possession of goods. Negotiating bank follows the doctrine of strict
compliance, to protect the interest of importer. So L/C looks after the
business interest of importer and exporter.

ADANTAGES OF L/C FOR EXPORTER


- Exporter gets certainty of payments from the bank not from importer by
presenting complying documents. Exporter will get payment in its own
country against presentation of documents after shipment of goods before
importer takes possession of the consignment.
- Integrity and credit worthiness of the importer is replaced with its bank
which is called issuing bank. Credit risk of the importer is shifted to the its
bank.
-Exporter has the right to accept or reject or ask for the amendments of
the L/C. L/C is received in advance by the exporter.
-Exporter can raise finance from the bank easily, to meet its financial
needs, at pre and post shipment stages.
- Exporter will ship the goods if it gets L/C on agreed and known terms
and conditions.
- In addition to non- payment risk of the importer; there is the country risk
of the importer. Some of these risks can be reduced by arranging L/C
available in the country of the exporter and getting reimbursement from
the bank outside the country of the importer. Moreover to manage the
country risk, exporter should demand the confirmed L/C.
- It gives the surety to export that the trade order will not be cancelled by
importer.
- Any change in L/C terms will requires the acceptance of the exporter.

DISADVANTAGE
-Exporter will get payment based on complying documents, Exporter has
to prepare the documents to comply with terms and conditions of letter of
credit. Compliance of documents with L/C terms/conditions has to be
decided by banks not by exporter or importer.

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-Discrepancy or defects in the documents will not allow payment to the
exporter. Discrepancies can be rectified before date of expiry of L/C.

-L/C makes the export transaction with strict time schedules. Any delays
will lead to discrepancy or denies the payment to exporter.

-Payment by negotiation by nominated bank give payment to exporter with


recourse. Under recourse, negotiating bank has the right to recover
payment along with interest from the exporter, if it does not get
reimbursement from issuing bank.

BANK COLLECTION METHOD OF PAYMENT

Exporter and importer are in different countries. To ensure payment to


exporter and delivery of trade documents specially bill of lading, to the
importer in order to take the delivery of goods in its country. Help of the
banks in their respective countries is taken in this method of payment.
Under bank collection method, involved banks, collect payment for
exporter from the foreign buyer. As per the sale agreement, if importer
makes immediate payment or after the completion of credit period, only
then bank will collect the payment for exporter. After having collected the
payment from importer on due date, bank will pass the payment to
exporter. This method of payment is comparatively cheaper. It is used by
exporter having long business dealing with the buyer, with satisfactory
dealing/payment history.
This method of payment is generally avoided while dealing with new
buyer. Under this method, the involved bank help in collecting the
payment. If buyer makes the payment exporter gets it. In this case
payment entirely depends on the capacity and integrity of the importer.
Banks are not responsible for the payment, as in the case of letter of
credit. They only help in collecting the payment.
Under this method, the payment takes place in buyer country and not in
seller’s country, as in the case of letter of credit. As such, under this
arrangements banker of the exporter has to arrange the documents along
with bill of exchange, so to present them to the importer through the
collecting bank in the country of the importer. Exporter has to give specific
instructions to its bank regarding collection of payment, handling of

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documents, handling of goods and contacting the party in case
dishonouring of the documents by the importer. Special instruction has to
be issued to the banks depending on sight payment or payment after the
credit period.
Payment term under collection may on sight basis where no credit period
is given to the buyer. Sight term means to importer is to see and pay. In
case exporter gives credit period to the importer then documents will be
delivered to the importer against acceptance to make payment, on future
due date. Importer will take possession of the goods and later on due date
may make payment. Very risky payment term for exporter. Exporter
should avoid giving later payment term to new importers.
IMPORTANCE OF BILL OF EXCHANGE
In bank collection bill of exchange which a legal document under
negotiable instrument act 1882 plays very essential role. Bill of exchange
is an order in writing by the drawer (the exporter) to drawee (an importer)
to pay some definite amount immediately or after some time. If payment
term is immediate then sight bill of exchange will be drawn by the exporter.
If exporter gives some credit period to the importer, in this case time or
usance period bill of exchange, equivalent to credit period will be drawn.
Bank collections are governed by the rules contained in International
Chamber of Commerce Paris Brochure no 522 and payment instructions
issued by exporter to the bank.
MECHANISM OF BANK COLLECTION
Under this method exporter submit the documents after shipment within
21 days from date of shipment to the bank. This bank is called reimbursing
bank. Exporter also furnishes detailed instructions about the collection
and agreed payment term. If no credit period is given to the importer the
payment term will be sight. In case credit period is given to the importer
then term or usuance period bill of exchange will be drawn.
The documents along with instructions and collection term will be sent to
the collecting bank which is the correspondent bank of the exporter bank.
Duty of the collecting bank is to present the documents for payment in
case of sight bill of exchange and for acceptance of bill of exchange in
case of credit sale. Collecting bank duty is to collect the payment and send
to the exporter bank. Exporter will get payment when importer will make
the payment. Banks are helping in handling the trade documents and
payment.

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In case of documents against acceptance, it will call the importer in the
branch office for acceptance. After the acceptance of bill of exchange, it
will give the documents to importer. Collecting bank will immediately
inform the exporter bank about the acceptance and due date of payment.
Thereafter, collect the payment from importer on due date and remit the
amount to exporter bank.
In case of non-payment or non-acceptance of bill of exchange by the
importer, collecting bank will inform the exporter bank and seek
instructions for protection of the goods and disposal of the documents.

Let us understand the bank collection procedure in each payment term as


under:
PAYMENT INSTRUCTION BY EXPORTER- WITH NO CREDIT PERIOD
GIVEN TO IMPORTER
Payment instruction has to be issued by the exporter to the bank, as to
how, to collect the payment from importer. These instructions should be
as per the sale contract. Payment instruction may be on sight, if exporter
has not given any credit period to the importer. Sight is the trade term
which means that importer should see the bill of exchange and pay
immediately. In this case collecting bank will call the importer in its branch
office and instruct to make full payment, to receive the documents relating
to the goods.
In case importer visits the branch and makes payment, it will get the
documents. When ship will call at its port, importer will present the bill of
lading and take the delivery of goods. In case importer does not pay the
bill it will be treated as dishonoured. Collecting bank in importer country
will seek the help of the exporter bank for disposal of documents. In such
case collecting bank will arrange for the clearance, warehousing and
insurance of the goods. All the expenses has to be borne by the
exporter. Then seek the instruction of the agent of the exporter or its bank
for the disposal of the goods.

PAYMENT INSTRUCTION- WHEN CREDIT PERIOD IS GIVEN TO


IMPORTER BY EXPORTER
In case of credit is given to the importer say for 30 days, 60days or 90days
etc. for the payment, then time draft or usuance bill of exchange
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equivalent, to the credit period given to importer will be drawn. In such
cases time draft will become essential part of the set of documents.
Collecting bank in the country of the importer will inform the importer about
the receipt of documents. Further, importer will be asked to accept the
time draft, so to make payment on due date and documents will be
delivered to the buyer. The bill of exchange duly accepted by the importer
will be retained by the collecting bank. It will be treated as trade
acceptance.
Collecting bank has the duty to inform the exporter bank about the
acceptance of the bill and also intimate the due date. Importer will take
delivery of the goods on arrival of the ship. Importer will be the drawee of
time bill of exchange and is liable to make payment on due date.
On due date, if importer pays, the amount will be remitted for the payment
to the exporter. Otherwise, it will be treated as dishonoured and collecting
bank will take actions, as per the instructions given by the exporter
through its remitting bank. So in this case the exporter will get payment
only if importer makes the payment. Banks acts here as payment
collecting agent only. Banks do not act as payment making agents as in
case of L/C. Banks acts as payment collecting agents and their rights and
obligations have been mentioned in Uniform collection Rules By
International Chamber of Commerce Paris brochure 522.
PROTECTION AGAINST NON PAYMENT
Exporter can arrange with importer that its bank will also accept the
time bill of exchange. Then it will become best instrument of
payment. On due date, as per law the accepting bank has to make
payment. It is called banker’s acceptance. It separate the payment
from sale of goods. Best arrangement for the exporter payment.
Exporter can demand stand by L/C issued by reputed importer bank
to protect against non payment by importer on due date.
Take ECGC policy to protect against non payment in bank collection
method of payment.
In case of export on FOB, exporter must arrange contingency
insurance from Indian insurance company, to protect against non
insurance by importer.

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DISHONOURING IN BANKS COLLECTION BY IMPORTER
Dishonouring of bank collection means, in case of sight collection importer
may not make payment to collecting bank. In this case, he will not get the
document called bill of lading. Importer cannot take possession of goods
without this document. Goods when reached to the port will attract very
heavy port charges. To protect against payment risk, exporter must
obtain ECGC policy before shipment.
In case of time draft, importer will take delivery of goods and may not make
payment on due date. Goods gone and payment also gone. It is very
dangerous situation for the exporter. This payment term is very risky for
exporter. Give this facility to credit worthy importers where past dealing is
very satisfactory. Do not do shipment goods without taking ECGC
policy.
In case of non-payment, it will be very expensive, to take legal action
against the importer in the foreign country. Some- times exporter
may take the services of Debt Collectors. They also take very heavy
commission. It is prudent to take all precautions while selecting the
importer and to take ECGC policy before shipment.
In case of dishonouring of sight draft, exporter has to find out the
alternative buyer in the same country or in another country by giving
heavy discounts. In some case, exporter may have to bring back the
goods. It may be very heavy cost to the exporter, which may be
unbearable to the new exporter.

ADVANTAGES OF BANKER’S COLLECTION TO EXPORTER


This method is much better for the importer than exporter. Bank collects
the payment on the basis of instruction of the exporter only. Bank acts as
the agent of the exporter.
ECGC protects the payment risk of the importer.
Title of the documents can be transferred to importer bank. Importer will
get the goods only either by making payment or accepting the draft.
In case of non-payment by the importer, the collecting bank takes the
responsibility of taking the control of released goods and protect them by
taking appropriate insurance.

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DISADVANTAGES OF BANKER’S COLLECTION TO EXPORTER
Very risky for the exporter. Importer may not honour the commitment and
may not clear the goods at the foreign port. Port authorities may levy
heavy charges and penalties which will be paid by the exporter.
Documents against acceptance is more risky than sight payment for
exporters. This term may be given to very reputed big buyer or to
regular buyers with excellent past experience.

OPEN SALE ACCOUNT METHOD


This is the most used method of payment in local and international
business. Each buyer wants to use this method of payment, in import of
goods and services. 70% to 80% importers demand open sale term
payment from the exporters. In this method, importer want to use
exporter’s funds as working capital for its business. This method is
opposite to advance payment and very favourable to the importer.
In some situation exporters have to use this method, to get orders, from
status importers. Here importer wants, to take the delivery of goods and
intends to make payment, only after the receipt of sale realisations from
the local consumers. It means that importer wants to do the business
with the exporter money. Such approach will help him to do more
business with less of its own money.
This method of payment extremely risky for exporter. Success of an
open account method is convenient to exporter, if the importer is
well established in its business, has a long and favorable payment
record, or has been thoroughly checked for creditworthiness and
integrity. With an open account, the exporter simply bills the customer,
who is expected to pay under agreed terms at a future date. This is very
risky transaction for exporter as GOODS and DOCUMENTS are sent
directly to importer. Some of the largest firms abroad make purchases
only on open account.

MECHANISM OF OPEN SALE ACCOUNT


First of all exporter and importer agrees to use open sale account method
of payment for the execution of the trade transaction. The contract will
also decide the time period after which the importer has to make payment

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and time schedule of shipments. Normally, this type of method is used
when parties have satisfactory with past payment record/dealings.
Under this arrangements the goods are shipped directly in the name of
the buyer or its agent. Documents relating to the goods are also sent
directly to the foreign buyer. Importer will get the goods without making
any payment. Normally importer gets the time to make the payment to the
exporter after some time as per the agreement. Importer will become the
owner of the goods. It will sell the goods to its local customers. It want to
make payment after collecting the payments from the customers. It wants
to do business with the money of the exporter.
OPEN SALE METHOD IS HIGH RISKY METHOD OF PAYMENT FOR
EXPORTER
However, there are risks for exporter to use to open-account sales method
of payment. The absence of documents and banking channels might
make it difficult, to pursue the legal enforcement of claims. In case of
dishonoring, the exporter might also have to pursue collection in foreign
country, which can be difficult and costly. Another problem is that
receivables may be harder to finance, because drafts or other
evidence of indebtedness is unavailable.
There are several ways to reduce credit risk. Exporter must take ECGC
policy or obtain factoring facility from ECGC or Banks or factor. Obtain
credit report on buyer to check credit worthiness.
Exporters contemplating a sale on open-account terms should thoroughly
examine the political, economic, and commercial risks. They should also
consult with their bankers for obtaining finance for the transaction before
issuing a pro forma invoice to a buyer. Further, no shipment without
obtaining ECGC policy. Exporter should ask the importer to arrange
acceptance of usuance bill of exchange by reputed bank in importer
country. In this case bank has to make payment on due date. Further in
high value and regular base export transactions, exporter can demand
stand by letter of credit from reputed bank in importer country. This will
ensure payment from the bank in case of default by the importer.
CONSIGNMENT SALES METHOD OF PAYMENT
Mostly this method is used when exporter makes long term commitments
for the supply of goods to the distributors in importing country or to big
foreign buyers.

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The goods are shipped to a foreign distributor directly and documents are
also sent directly to it. Distributor will get the goods on execution of the
trust receipt and sell them on behalf of the exporter. The exporter retains
title to the goods until they are sold. In this case exporter must get
payment within the period of 15 months from date of shipment. Foreign
party will make payment by sending payment schedule to the bank
containing the payment and details of expenses with receipts.
The exporter has high risk and a least control over the goods with this
method. The ownership remains with the exporter. All charges relating to
clearance and protection of the goods are on the account of the exporter.
Foreign buyer will remit the payment after deduction of all these charges.
Goods are under the possession of the consignee but owner ship lies with
the exporter.
Further, shipment charges and insurance charges will be paid by
exporter and must be arranged with Indian companies. Normally this
arrangements are used while dealing with the distributor or the agents of
the exporter. In addition, it may be necessary to conduct a credit check on
the foreign distributor.

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