Payment on International Transactions

Whether importing, exporting or entering into a distribution agreement, a key provision is the payment terms provision. Various arrangements will allow you to reduce the risk of non-payment, of late payment; or if making payment, to make payment less burdensome and risky. The important point is that you be sure consciously to address this consideration in every transaction.

Normally, a business will use different arrangements in different markets, regions, countries, or aspects of the same transaction. Types of financial arrangements are:

Open Account: goods are delivered without guarantee of payment to a buyer with a history of successful dealings. It may be a basic open account or factoring using open account. Factoring is a form of transferring the accounts receivable to a factor who collects on them.

Consignment Sales: this offers some protection for the seller, but only a limited amount in the international context.

Documentary Collection: Possession and title pass to the buyer (through a bill of lading, waybill, commercial invoice, insurance certificate, certificate of origin and the like) as title is passed; simultaneously, a payment document is given to the seller (bill of exchange or sight draft or time draft). The seller, however, is not obligated to accept the goods and the seller has no recourse against the bank for payment so this method has disadvantages.

Letters of Credit: The buyer's bank issues a letter promising to pay the seller upon demand or upon delivery of documents showing that an underlying commercial transaction has been completed. There many forms of letters of credit. They can be as rigid or as flexible as the parties deem fit. The seller will want few requirements imposed on the goods with much flexibility in shipping and pricing, but with much protection for payment being received. The buyer will want vice versa. Letters of credit, if written properly, can alleviate almost any risk. The main points to consider when negotiating terms of an international letter of credit are:

• the form of payment
• currency of payment
• advising method
• the amount of value to be covered
• which party pays the bank charges including amendments
• language tying payment to proper performance
• language allowing partial shipments, transhipments, combined shipments, and consolidations
• language providing for any other particular need

Other Methods: Many other payment arrangements can be worked out and are used including the seller requiring prepayment, credit cards, forfaiting, shipping company finance, guarantees of payments, bonds, and bank demand guarantees.

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