As an exporter, you always want to be paid correctly for your product. And of course, you’d love to be paid in advance. Your foreign customer, however, does not want to buy pig in a poke, the reason why he prefers to pay afterwards, after receiving and checking the merchandise. None of the parties wants actually to bear the risks associated with international trade relations. Fortunately, it is possible to absorb this risk, so that the transaction can be executed without worries for both parties. 

 

 

Many exporters do business in "open account" (which means that the seller ships the goods and commercial documents directly to a buyer who agrees to pay a seller’s invoice after the receipt of goods). There is nothing wrong with that, provided that parties have been doing business with each other for a long time and therefore they trust each other. But what to do if you have to deliver to your foreign customer for the first time and you don't trust him that much?

 

How can you ensure that your customer is satisfied and that you are paid correctly?

 

Documents against payment

 

The first and at the same time the easiest way is the payment method called "documents against payment".

 

Under this payment method the exporter hands over a package of commercial documents (including the original invoice and the transport documents needed to clear the goods) to his bank or directly to the foreign buyer's bank. These documents may only be handed over by the bank to the foreign buyer after the buyer has paid for the goods. By using this method, the exporter remains in control of his goods and he is also sure that the goods will be paid for. In turn, the buyer knows that the goods have been shipped and that he will receive them after payment. In other words, both parties have more certainty, it does not cost a lot of money and it is relatively easy to set up.

 

Compared to open account, this payment technique certainly offers a number of advantages.

 

However, it also has a few drawbacks: e.g., if the buyer does not proceed to payment directly, his banker will be able to exert moral pressure on him, but will not be able to force him to pay effectively.

 

This risk can be mitigated with the second technique, i.e. the "Letter of Credit".

 

Letter of Credit

 

A Letter of Credit can be described as a payment technique whereby the foreign buyer's banker unconditionally undertakes to pay a certain sum to the exporter on presentation of the documents listed in the Letter of Credit documents.

 

This payment technique is more advanced than "documents against payment", but it is also more formal and more expensive.

 

The goods are shipped only after the exporter's bank has explicitly confirmed that the Letter of Credit has been opened by the importer's bank.

 

The requested documents have to be handed over by the exporter to his own bank after the goods have been shipped. The exporter's bank forwards these documents to the buyer's bank. If, after verification, the buyer's bank establishes that all the documents are correct, it pays the exporter via his domestic bank.

 

By using this method, the seller doesn’t depend on the buyer's will to pay, since the buyer's bank will pay the seller as soon as the required documents have been submitted.

 

This technique gives the exporter considerable security. However, it can still go wrong when the foreign bank of the buyer goes bankrupt in the meantime, or when, due to political or social problems, it cannot meet its obligations and therefore cannot pay out to the exporter.

 

Is it possible to absorb this risk as well? Yes. How? By claiming a confirmed Letter of Credit instead of an ordinary Letter of Credit.

 

Confirmed Letter of Credit

 

The difference between an ordinary form of a Letter of Credit and a confirmed Letter of Credit is that in the case of a confirmed Letter of Credit, the exporter has the right, in addition to the foreign bank of the buyer, to address his own bank in payment. Provided, of course, that the documents listed in the documentary credit are in order. In other words, the exporter has two debtors. In this way, the risk of insolvency of the buyer's bank and of political or social instability in the buyer's country can be eliminated and the exporter can also be paid much faster.

 

As an exporter you should always try to get a confirmation from your bank, because this payment technique offers you the most security.