SITPRO Briefings
Financial
Methods of Payment in
International Trade
SITPRO
Simplifying International Trade
SITPRO Briefings Introduction
Financial
Methods of Payment in Getting paid for providing goods or services is critical for any business. However, getting paid for
International Trade an international transaction (also commonly known as "export receivables") can be a very different
experience from securing payment on business with other UK entities, due to the number of extra
Who Is This Briefing For?
factors that can influence the process.
You should read this Briefing if you
trade internationally and want to know The main factor in considering how an exporter expects to be paid for a transaction is the potential
what your options are in making and
receiving international payments. You risk that they and their customer are willing to face between them - don't forget, there are always
may wish to pass on the information in two sides to any situation. There are different types of risk that you will face as an exporter, this
this Briefing to your colleagues in the briefing will consider the payment risk.
Sales & Marketing team and your
Finance Director so that they are
aware of these issues. It is often a good idea, during, or even before contract negotiations, to consider where, on the
diagram below, you and your customer will be comfortable in placing yourselves.
What Does This Briefing Tell
Me?
Figure 1. Payment Risk Ladder
This Briefing explains the different Exporter Importer
methods of getting paid and the
different levels of risks involved. You
should note that none of the methods Least Secure Most Secure
outlined below will completely Open Account
eliminate the payment risks associated
with international trade, so you should Bills for Collection
consider your preferred payment
option with care and hedge the risks Documentary Credits
along with appropriate credit insurance
and credit checks on your customers.
Advance Payments
Most Secure Least Secure
Open Account
This is the least secure method of trading for the exporter, but the most attractive to buyers. Goods
are shipped and documents are remitted directly to the buyer, with a request for payment at the
appropriate time (immediately, or at an agreed future date). An exporter has little or no control over
the process, except for imposing future trading terms and conditions on the buyer. Clearly, this
payment method is the most advantageous for the buyer, in cash flow and cost terms. As a
consequence, Open Account trading should only be considered when an exporter is sufficiently
confident that payment will be received.
It should be noted that in certain markets, such as Europe, buyers will expect Open Account terms.
The financial risk can often be mitigated by obtaining a credit insurance policy to cover the
potential insolvency of a customer, that provides reimbursement up to an agreed financial limit.
There are a number of commercial insurers who specialise in this market - contact your insurance
representative for details.
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Advance Payment SITPRO Briefings
Financial
The most secure method of trading for exporters and, consequently the least attractive for buyers. Methods of Payment in
Payment is expected by the exporter, in full, prior to goods being shipped. International Trade
As one might imagine, having covered the two extremes on the Payment Risk Ladder, commercial
decisions have to be made and this usually results in selecting one of the middle rungs of the
ladder. This is where banking products such as Bills for Collection and Letters of Credit come in to
play.
Bills for Collection
More secure for an exporter than Open Account trading, as the exporter's documentation is sent
from a UK bank to the buyer's bank. This invariably occurs after shipment and contains specific
instructions that must be obeyed. Should the buyer fail to comply, the exporter does, in certain
circumstances, retain title to the goods, which may be recoverable. The buyer's bank will act on
instructions provided by the exporter, via their own bank, and often provides a useful
communication route through which disputes are resolved.
The Bills for Collection process is governed by a set of rules, published by the International
Chamber of Commerce (ICC) called "Uniform Rules for Collections" document number 522
(URC522). Over 90% of the world's banks adhere to this document - pick up a copy from the ICC
(See contact details below) or your bank and familiarise yourself with the contents.
There are two types of Bill for Collection, which are usually determined by the payment terms
agreed within a commercial contract. Different benefits are afforded to exporters by each and they
are covered separately below:
Documents against Payment (D/P)
Usually used where payment is expected from the buyer immediately, otherwise known as "at
sight". This process is often referred to as "Cash against Documents".
The buyer's bank is instructed to release the exporter's goods only when payment has been made.
Where goods have been shipped by sea freight, covered by a full set of Bills of Lading, title is
retained by the exporter until these documents are properly released to the buyer. Unfortunately,
for airfreight items, unless the goods are consigned to the buyer's bank no such control is
available under an Air Waybill or Air Consignment Note, as these documents are merely
"movement certificates" rather than "documents of title". Similarly there is no such control available
for road or rail transport.
Under URC522, goods should not be consigned to a bank without prior approval. Disclaimer
SITPRO is the UK's Trade Facilitation Agency
Documents against Acceptance (D/A) supported by the Department of Trade and
Industry. Its mission is to use its unique status to
Used where a credit period (e.g. 30/60/90 days - 'sight of document' or from 'date of shipment') has improve the competitive position of UK traders
been agreed between the exporter and buyer. The buyer is able to collect the documents against by facilitating change through: identification and
removal of barriers in the international trading
their undertaking to pay on an agreed date in the future, rather than immediate payment. The process; identification and promotion of best
exporter's documents are usually accompanied by a "Draft" or "Bill of Exchange" which looks trading practices; delivery of practical, value for
money electronic commerce and associated
something like a cheque, but is payable by (drawn on) the buyer. When a buyer (drawee) agrees trading solutions; and, influencing future trade
to pay on a certain date, they sign (accept) the draft. It is against this acceptance that documents policies.
Every effort is made to ensure that the
are released to the buyer. Up until the point of acceptance, the exporter may retain control of the information given herein is accurate, but no legal
goods, as in the D/P scenario above. However, after acceptance, the exporter is financially responsibility is accepted for any errors,
omissions or misleading statements in that
exposed until the buyer actually initiates payment through their bank. information caused by negligence or otherwise.
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SITPRO Briefings Bills for Collection are used in certain markets (particularly Asian) to fulfil Exchange Control
Financial Regulations. They are a cost-effective method of evidencing a transaction for buyers, where
Methods of Payment in documents are handled (and reported) via the banking system.
International Trade
Letters of Credit (L/Cs), also known as Documentary
Credits (DCs)
What is a DC?
A bank-to-bank commitment of payment in favour of an exporter, guaranteeing that payment will be
made against certain documents that, on presentation, are found to be in compliance with terms
set by the buyer.
This is an area in which financial terminology (and acronyms) really builds up a head of steam. It is
probably worth explaining some commonly used terms, to provide a basic understanding.
Like Bills for Collections, DCs are governed by a set of rules from the ICC. In this case, the
document is called; "Uniform Customs and Practice" and the latest version is document number
500. In short, it is known as UCP500 and, again, over 90% of the world's banks adhere to this
document.
Irrevocable: The terms and conditions within a DC cannot be changed without the express
agreement of the exporter (the beneficiary). Revocable DCs are very unusual, as the conditions
can be changed unilaterally by the buyer, which is rarely acceptable to an exporter.
Unconfirmed: The payment commitment within the DC is provided by the buyer's (Issuing) Bank.
Confirmed: If an exporter has any concerns about the circumstances which may prevent payment
being made from either the Issuing Bank or buyer's Country, the adding of "Confirmation" moves
the bank/country risk issues to the bank which adds it's confirmation (the Advising bank) and
notifies the DC to the exporter. The price of such a confirmation will obviously depend upon the
level of perceived risks to be covered. Banks can often provide indicative pricing for confirmations
prior to the arrival of the DC, so that costs can be estimated.
What does all this mean?
The exporter and buyer can agree detailed terms, as part of the commercial contract. This can
include exactly what documents need to be produced and precisely what detail such documents
should quote.
DCs, as well as offering a bank's commitment to pay, also offer benefits in terms of finance. Speak
to your bank, or the Advising/Confirming Bank to see how they can help. Additionally, Commercial
Insurers now offer an insurance-backed product that covers the same basic risks as confirmations.
Please speak to your insurer for details.
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Standby Letters of Credit (SBLCs) or Bank Guarantees SITPRO Briefings
Financial
SBLCs are similar to Bank Guarantees, in that they sit behind a transaction and are only called Methods of Payment in
upon if the buyer fails to pay in the normal course of business (which is often Open Account). They International Trade
can be particularly useful to cover an underlying financial risk where multiple payments are to be
made, possibly as part of an agreed schedule. However, they do not offer the documentary control
of DCs to buyers and, as such they are an unconditional guarantee.
Other International Trade Risks
Customer Risks
Can they / will they pay? Exporters should find out everything they can about their buyers. Banks
can help by contacting the buyer's bank for a reference. There are many commercial organisations
that can provide credit information at relatively little cost. Does the exporter have any local contacts
or agents who might be prepared to find out what they can?
On the basis of the above information, the exporter can start to think about his stance in terms of
the payment risk ladder (fig.1 above).
Country Risks
There is no substitute for good information and many exporters will visit a new or potential export
market before they begin trading, to try and understand "how it ticks". If this is not possible, there
are a number of Government agencies that can provide much data. UK organisations include:
• UK Trade and Investment
• Institute of Export
• Local Chambers of Commerce
• Banks
Key data subjects will include:
• Economic, financial and political stability - at a National as well as financial institutional level;
• Foreign Exchange availability and volatility - an exporter's UK bank should be able to assist
here also
• Import restrictions/tariffs - Are there any?
• Does the country have a habit of changing rules regularly or quickly?
Disclaimer
SITPRO is the UK's Trade Facilitation Agency
supported by the Department of Trade and
Industry. Its mission is to use its unique status to
improve the competitive position of UK traders
by facilitating change through: identification and
removal of barriers in the international trading
process; identification and promotion of best
trading practices; delivery of practical, value for
money electronic commerce and associated
trading solutions; and, influencing future trade
policies.
Every effort is made to ensure that the
information given herein is accurate, but no legal
responsibility is accepted for any errors,
omissions or misleading statements in that
information caused by negligence or otherwise.
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Main Types of Money Transfers SITPRO Briefings
Financial
SWIFT Inter-Bank Transfer - now firmly established as standard practice in the major trading Methods of Payment in
nations. The buyer will instruct their bank to make payment to any bank account specified by the International Trade
exporter. It is good practice, therefore, for the exporter to include their account details on their
invoice heads.
Useful Information:
Buyer's Cheque - an unsatisfactory method of settlement for the exporter as it carries the risk of • ICC Uniform Customs and Practice
dishonour upon presentation as well as the added inconvenience of being slow to clear. There is for Documentary Credits (UCP
also the very real danger of the cheque being lost in transit as well. A cheque is also unsatisfactory 500)
ICC Publication No. 500
if it is in the currency of the buyer, as this will take longer to clear and will involve additional bank
• ICC Uniform Rules for Collections
charges. Exporters should only use this method if they have an established trading history with (URC 522)
their customer or in cases where the profit margin has been increased to offset cash flow problems ICC Publication No: 522
anticipated by the delay in receiving payment.
Further Help
Banker's Draft - this is arranged by the buyer who asks their bank to raise a draft on its ICC (UK)
12 Grosvenor Place
corresponding bank in the exporter's country. Provides additional security to a buyer's cheque, but
London
they can be costly to arrange and they do run the risk of getting lost in transit. SW1X 7HH
Tel: 020 7838 9363
International Money Orders - these are similar in nature to postal orders. They are pre-printed Fax: 020 7235 5447
Website: www.iccuk.net
therefore cheaper to obtain than a Banker's Draft, although again there is the risk of loss in transit.
SITPRO Ltd
Acknowledgement Tel: 020 7467 7280
Email: [email protected]
SITPRO gratefully acknowledges the assistance of HSBC in the drafting of this briefing.
SITPRO
Simplifying International Trade
Oxford House
8th Floor
76 Oxford Street
London
W1D 1BS
Tel: +44 20 7467 7280
Fax: +44 20 7467 7295
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herein is accurate, SITPRO Ltd. accepts no legal responsibility for
any views expressedwww.sitpro.org.uk
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