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Exporting Basics

To some extent, you are always at risk at payment time, even with domestic sales. It's important, therefore, to check out the buyer. The payment terms should be more demanding for less-known buyers. Letters of Credit (L/Cs) or documentary drafts (sight or time) are more common export payment methods. They provide reasonable security for you and some latitude for the buyer on when to pay. L/Cs are the most secure after cash in advance. You are virtually assured of payment when the buyer receives the goods. However, many importers prefer still more time to pay. Because buyers can often get better terms from your competitors, L/Cs are not always an option. Thus, documentary drafts (payment after a specified time period) are frequently used. If you need to use open account to be more competitive, you can still be assured of payment with an export credit insurance policy from governmental or other export credit insurance programs (e.g., the U.S. Export-Import Bank’s Small Business Export Insurance Policy and Coface @Rating Export Insurance). Alternatively, to avoid risk altogether and get paid right away, you can discount your export receivable to a factoring or forfaiting company.

Export sales also pose foreign exchange risks. For protection, you should require payment in a stable currency (e.g., U.S. dollars). Even if the buyer's currency depreciates, you are still owed the dollar amount specified. However, the buyer would have to put up more local currency than expected, and might default as a result. The different export payment methods are described below from the most to the least secure:

Advance payment by credit card or wire transfer virtually eliminates all risk of default before delivery. That’s clearly to your advantage. However, while advance payment has helped spur the exploding growth of domestic e-commerce, it creates cash flow problems for importers and increases their risks – for example, that the goods they receive are damaged, defective, or not exactly what they ordered. Don’t expect foreign buyers to agree to advance payments except, perhaps, for relatively small consumer purchases.

Here's a typical L/C scenario:

• The exporter and the importer agree on the terms of a sale.
• The importer applies for the L/C for the amount due from a local commercial bank (Appendix G1). The L/C is normally “irrevocable” to protect both parties (no changes permitted without the consent of both the buyer and the seller). The bank typically requires the buyer to put up collateral to cover the L/C amount. At this point, the buyer’s bank takes on the obligation to pay you.
• The importer's bank prepares the irrevocable L/C and all instructions (Appendix G2) concerning the shipment.
• The importer's bank sends the irrevocable L/C to a correspondent bank in the exporter’s country, requesting “confirmation”. At this point, the confirming bank accepts the obligation to pay the exporter.
• The confirming bank sends the exporter a letter of confirmation along with the “confirmed, irrevocable” L/C.
• The exporter reviews and accepts all conditions in the L/C.
• The exporter’s freight forwarder arranges to deliver the goods to the appropriate exit port or airport.
• When the goods are loaded, the forwarder completes the necessary documents.
• The exporter or the forwarder present documents to the confirming bank showing full compliance with all the product and delivery terms and conditions specified in the L/C.
• The confirming bank checks that documents are in order and sends them to the importer's bank for review.
• The importer gets the documents from his bank and uses them to claim the goods.
• The confirming bank pays the exporter by draft at the time specified.

Compliance with all L/C terms is crucial. You should carefully review the L/C and make sure the price and terms are the same agreed to in price quotes and other documents. If the L/C terms are not precisely met, the bank might not pay. Also, the bank will only pay the amount in the L/C, even if higher charges for shipping, insurance, or other factors are documented. If the L/C terms can't be met, or it has errors or even misspellings, you should contact the buyer immediately and ask for an amendment to the L/C to correct the problem.

To get paid, you must provide documentation showing that the goods were shipped by the date specified. The freight forwarder can advise about any unusual conditions that might delay shipment. You must also present the documents by the date specified. The bankers can advise whether there’s enough time to meet a presentation deadline. You should always request that the L/C specify that partial shipments and transshipment will be allowed. This will avoid unforeseen problems at the last minute. Documentary Drafts

• A Documentary Draft (Appendix G3), also known as a bill of exchange, is comparable to payment by check. Like checks, drafts sometimes carry default risks. The buyer's ability or willingness to pay could change between the time the goods are shipped and the time the drafts are presented for payment. Also, the policies of the importing country could change. If the buyer can't or won't pay for and claim the goods, you would have to dispose of or return them.

• A sight draft is less risky than a time draft. The buyer essentially pays when the goods arrive (upon sight or presentation of the documents conveying title). You retain title up the point you receive payment and the goods are released. In this case, the evidence of title is the original ocean bill of lading. Air waybills do not need to be presented to claim the goods. Hence, a sight draft used with air shipments carries somewhat more risk.

• A time draft is somewhat more risky than a sight draft, because the buyer is given a specified time to pay after receiving the goods. A time draft would be used if you want to extend credit to the buyer, such as 30 or 60 days after acceptance of the draft. By signing and writing "accepted" on the draft, the buyer is normally obligated to pay within the stated time. In this situation the draft is called a trade acceptance and can be either kept by you until maturity or sold to a bank at a discount for immediate payment.

• A date draft differs slightly from a time draft in that it specifies a date on which payment is due (for example, December 3, 2001) rather than a time period after the draft is accepted. When a sight draft or time draft is used, a buyer can delay payment by delaying acceptance of the draft. A date draft can prevent this delay in payment, but still must be accepted. When a bank accepts a draft, it becomes an obligation of the bank and creates a negotiable instrument known as a banker's acceptance. This can also be sold to a bank at a discount for immediate payment.

Open Account

• Open account sales are riskier still and should not be used for new or relatively unknown customers. The buyer gets your bill and is expected to pay under agreed terms at a future date. The absence of documents and banking channels may make it difficult to pursue claims, particularly in the buyer's territory. Also, receivables may be harder to finance, since drafts or other evidence of indebtedness are unavailable. However, since credit is often a key competitive factor, do consider open account for loyal, longstanding customers and for buyers that are large and well established, have solid payment records, or have been thoroughly checked for creditworthiness.

• Countertrade and barter transactions are more complex and not for novice exporters. Nevertheless, they may have to be considered in countries that restrict importer access to foreign exchange. Simple barter – payment in kind – is rare, because the exporter generally has no interest in the importer’s products and no easy way to sell them for cash. Other, more common forms of countertrade typically involve contractually linked, parallel transactions. For example, the importer will be allowed access to foreign exchange to purchase the exporter’s product, provided the exporter agrees to export a related quantity of goods from the importing country. If countertrade is your only available option, you can work the deal through intermediaries that specialize in these types of transactions, such as international brokers, international banks, or export management company.

Factoring and Forfaiting are further options for exporters willing to pay a premium for an up-front payment at no-risk. In both cases, you sell your export receivable to a third party at a discount (face value less the premium). The third party – a factor or forfaiter – typically assumes all transaction risks to collect the full amount from the buyer. The factoring premium ranges around 15% and is used primarily for smaller, short-term transactions. Forfaiting is used more for longer-term transactions, particularly involving installment payments. In these cases, the forfaiter is often a financial institution.