Method |
Usual Time of Payment |
Goods Available To Buyer |
Risk to Seller |
Risk to Buyer |
Comments |
CASH IN ADVANCE |
Before shipment |
After payment |
None |
Complete - relies on seller to ship exactly the goods
expected, as quoted and ordered |
Seller's goods must be special in one way or another,or special circumstances prevail over normal trade practices (example, goods manufactured
to buyer-only specification). |
LETTER OF CREDIT
(See next two items.) |
|
|
Commercial Invoice must match the Letter of Credit exactly. Dates must be carefully headed - "Stale" documents are unacceptable for
collection. |
|
Letters of Credit require total accuracy in conforming to terms, conditions, and documentation. Consult your United Shipping Associate member for
determining feasibility of terms and conditions. |
Confirmed
Irrevocable Credit |
After shipment is made, documents presented to the
Bank. |
After payment |
Gives the seller a double assurance of payments - Depends on the terms of the letter of credit. |
Assures shipment is made but relies on exporter to ship goods as described in documents. Terms may be negotiated prior to letter of credit
agreement, alleviating buyer's degree of risk. |
The inclusion of a second assurance of payment (usually a U.S. Bank) prevents surprises, adds assurance that issuing bank has been deemed
acceptable by confirming bank. Adds cost and an additional requirement to seller. |
Unconfirmed
Irrevocable Credit |
Same as above |
Same as above |
Seller has single bank assurance of payment and seller remains dependent on foreign bank. Seller should contact his banker to determine
whether or not the issuing bank has sufficient assets to cover the amount. |
Same as above |
Credit can be changed only by mutual agreement, as stipulated in a sales agreement. Becomes open account with buyer's bank as collection
agent. Foreign bank may have problems making payment in sum or timeliness. |
DRAFTS
(See next two items.) |
Remittance time from buyer's bank to seller's bank may still take one week to one month. |
|
Drafts, by design, should contain terms and conditions
mutually agreed upon. |
|
A draft may be written with virtually any term or condition agreeable to both parties. When determining draft tenor (terms and conditions)
consult with your banker and freight forwarder to determine the most desirable means of
doing business in a given country. |
Sight Draft (with documents against acceptance) |
On presentation of draft to buyer. |
After payment to buyer's bank. |
If draft not honored, goods must be returned or resold. Storage, handling, return freight expenses may be incurred. |
Assures shipment but not content, unless inspection or
check-in is allowed before payment. |
A draft can be a collection instrument used to exchange possession and title to goods for payment. Seller is essentially drawing a check against
the bank account of the buyer. Buyer's bank must have pre-approval, or seek approval of
the buyer prior to honoring the check. Payable upon presentation of documents. |
Time Drafts (with documents against acceptance) |
On maturity of the draft |
Before payment, after acceptance |
Relies on buyer to honor draft upon presentation. |
Assures shipment but not content, time of maturity allows for adjustments, if agreed to by seller. |
Payable based upon the acceptance of an obligation to pay the seller at a specified time. Although a time draft has more collection leverage
than an invoice, it remains only a promissory note, with conditions. |
OPEN ACCOUNT |
As agreed, usually by invoice |
Before payment |
Relies completely on buyer to pay account as agreed |
None |
All terms of payment, including extra charges and terms should be mutually understood and agreed upon prior to open account initiation. Companies
conducting on-going business are candidates for open account terms of payment. Seller must
measure not only buyer's credit reliability but the country's as well. |