Apparel Exports

International
payment
terms
After a detailed evaluation of the
difference between export costing
and pricing, Vasant Kothari gives an
insight into the export price calculation
methods. These nuances are likely
to benefit apparel manufacturers/ n exporter may negotiate excellent
exporters in the long run. terms and perform an outstanding
deal, but if he is not paid, the deal
is lost. To succeed in today’s global
marketplace and win sales against
foreign competitors, exporters must
offer their customers attractive sales
terms supported by appropriate
payment methods. Getting paid in
full and on time is the ultimate goal of
every export sale.

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34 APPAREL May 2011


Payment methods
There are many ways to make and
receive payments in international trade.
Due to the physical distance between
the buyer and the seller, and the fact
that the transaction may have taken
place without the two parties actually
meeting, both are keen on minimising
the risk in payment transaction. The
the risks involved with
buyer wants to make sure he receives
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It is therefore important to set
If the exporter up the right terms of trade before
the transaction is carried out. If
appropriately selects the exporter appropriately selects
and arranges the and arranges the payment terms,
payment terms, he can he can significantly minimise the
risks involved with payments while
significantly minimise accommodating the needs of the buyer.
payments...
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the order in acceptable conditions and

on time, and the seller needs to know
that he will get paid for it on schedule.
When negotiating the terms of
payment, an exporter always faces
two dilemmas:
- if the exporter insists on more
secured payment terms, there is a
chance of lesser sales opportunities
(lower and less frequent orders,
allowing competitors with better
terms to take the advantage),
- if the exporter agrees on more
flexible payment terms, he runs the
risk of the payment being delayed.

APPAREL May 2011 35


There are four primary methods of
payment for international transactions.
During or before contract negotiations,
the exporter and importer should
finalise the best method, which is
mutually desirable.
1. Cash in Advance
2. Letter of Credit
3. Documentary Collection
4. Open Account
Cash in Advance
With cash-in-advance payment terms,
the exporter can avoid credit risk
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36 APPAREL May 2011
because payment is received before the
ownership of the goods is transferred.
Wire transfers and credit cards are the
most commonly used cash-in-advance
options available to exporters. However,
requiring payment in advance is the
least attractive option for the buyer,
because it creates cash-flow problems.
Foreign buyers are also concerned that
the goods may not be sent if payment is
made in advance. Thus, exporters who
insist on this payment method as their
sole manner of doing business may lose
to competitors who offer more attractive
payment terms.
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When to use Cash-in-Advance Terms:
• The importer is a new customer and/or
has a less-established operating history
• The importer’s credit worthiness is
doubtful, unsatisfactory or unverifiable
• The political and commercial risks of
the importer’s home country are high
• The exporter’s product is unique, not
available elsewhere, or is in heavy
demand
Letters of Credit
Letters of credit (LC) are one of the
most secure instruments available
to international traders. LC is a
commitment by a bank on behalf of the
buyer that payment will be made to the
exporter, provided that the terms and
conditions stated in the LC have been
met, as verified through the presentation
of all required documents. LC is useful
when reliable credit information about
a foreign buyer is difficult to obtain,
but the exporter is satisfied with the
creditworthiness of the buyer’s foreign
bank. LC also protects the buyer because
no payment obligation arises until the
goods have been shipped or delivered
as promised. Letters of Credit deal in
documents, not goods. Thus, the process
works both in favour of both the buyer
and the seller.
 Apparel Exports
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Before choosing LC as a term of trade,
he must understand what it is, how
it works and what exporter can do
to minimise risks involved in the LC
payment process. Letters of Credit are
regulated by International Chamber of
Commerce under the Uniform Customs
and Practice for Documentary Credits
(UCP 600). There are different forms
and types of LC, which the exporter
may (or should not) use in operations,
viz Revocable and Irrevocable LC,
38 APPAREL May 2011
Transferable LC, LC payable at sight, LC along with instructions for payment.
payable on the maturity date, Funds are received from the importer
and remitted to the exporter through
the banks involved in the collection in
Documentary exchange for those documents. DCs
Collections involve using a draft that requires
A documentary collection (DC) is the importer to pay the face amount
a transaction whereby the exporter either at sight (document against
entrusts the collection of a payment payment) or on a specified date
to the remitting bank (exporter’s (document against acceptance). The
bank), which sends documents to a draft gives instructions that specify the
collecting bank (importer’s bank), documents required for the transfer
of title to the goods. Although banks
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do act as facilitators for their clients,
DCs offer no verification process and
limited recourse in the event of non-
payment. Drafts are generally less
expensive than LCs.
There are two types of documentary
collections - sight draft, also known as
Documents Against Payment (DP), and
time draft, also known as Documents
Against Acceptance (DA). Sight draft
is payable by the buyer immediately
after notification by the buyer's bank of
the receipt of the draft and transport
documents. Dealing with the time
draft, always draw a draft against the
date specified in the other document
(For example, payable at 60 days after
invoice date/bill of lading date/the
draft date).
 When to Use Documentary Collections
With DCs, the exporter has little recourse
against the importer in case of non-payment.
Thus, DCs should be used only under the
following conditions:
• The exporter and importer have a well-
established relationship
• The exporter is confident that the
importing country is politically and
economically stable

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• An open account sale is considered too
risky, and an LC is unacceptable to the
importer

Open Account
An open account transaction is a sale
where the goods are shipped and delivered
before payment is due, which is usually in
Overview of DP Collection 30 to 90 days. Obviously, this option is the
Time of Payment After shipment, but before documents are most advantageous option to the importer
released in terms of cash flow and cost, but it is
consequently the highest risk option for an
Transfer of Goods After payment is made at sight
exporter. Because of intense competition in
Exporter’s Risk If draft is unpaid, goods may need to be disposed export markets, foreign buyers often press
of or may be delivered without payment if exporters for open account terms since the
documents do not control title extension of credit by the seller to the buyer is
more common abroad. Therefore, exporters
who are reluctant to extend credit may lose
Overview of DA Collection a sale to their competitors. However, the
Time of Payment On maturity of draft at a specified future date exporter can offer competitive open account
Transfer of Goods Before payment, but upon acceptance of draft terms while substantially mitigating the risk
of non-payment by using of one or more of
Exporter’s Risk Has no control of goods and may not get paid at the appropriate trade finance techniques,
due date such as export credit insurance.

The buyer wants to

make sure he receives
the order in acceptable
conditions and on
time, and the seller
needs to know that
he will get paid for it
on schedule.
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40 APPAREL May 2011