Finance and Insurance
Getting Paid
One of the other key considerations for all exporters is to ensure you receive payment. A mismatch in timing between your supplying of the goods or services and receipt of payment can have a significant impact on your liquidity. How and when you are paid is determined by:
- payment options determined by the contract you have negotiated with the buyer; and
- the inherent risks.
Payment Options
Whilst there are several options, most exporters choose prepayment, open account, documentary collection or documentary credit.
- Prepayment - Prepayment is obviously preferable, however, few buyers will offer these payment terms, especially if you are entering the market for the first time and your product has no sales history.
- Open Account – The exporter supplies goods to the buyer and then invoices the buyer for payment at a later date. In this instance, the exporter must be convinced of the buyer’s credit capacity to meet the postponed payment obligations.
- Documentary Collection – Using an intermediary
such as a bank, the exporter will ship the goods and present documentation
to his bank (remitting bank) with a lodgement authority that contains
certain instructions. This authority will instruct the remitting bank
to dispatch the documents to a second bank, which is to only release the
documents (and thus the title to the goods) against either:
- Payment of the goods (sight collection).
- A commitment to make payment at a agreed future date (term collection).
The bank will present the documents to the buyer for payment or acceptance of the corresponding bill of exchange. Once accepted, the documents will be released to the buyer and funds are transferred back to the exporter. Alternatively if payment is under term collection, the documents will be held by the bank for presentation on the due date and transfer of funds to the exporter.
The International Chamber of Commerce (ICC) has compiled a set of protocols to be applied to these transactions and they are known as the Uniform Rules for Collection (URC).
Copies of the protocols can be obtained from:
The International Chamber of Commerce
Australian Council
GPO Box 18008
Collins Street East
MELBOURNE Vic 8003Your bank may also be able to provide this information.
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Documentary Letters of Credit – Letters of credit (or LCs) may vary however the standard utilised is the Irrevocable Letter of Credit (ILC) whereby the bank issuing the ILC bears the responsibility to make payment to the exporter.
A documentary credit is an advice issued by a bank authorising the payment of money to the seller in return for the delivery by the seller of documents evidencing the shipment of the goods.
A documentary credit issued by a creditworthy bank guarantees payment to the seller on condition that he presents the correct documents. The bank’s creditworthiness is substituted for that of the buyer’s, providing security for the seller in getting paid.
Once again, the ICC has established rules that apply to LCs, known as the Uniform Customs and Practices for Documentary Credits (UCP).
Types of Risk
To ensure you are paid in full and on time it is important to recognise that along with the variety of payment methods available, are associated risks that need to be taken into consideration. These risks include:
- Credit risk
The risk of default, insolvency, or fraud by either the buyer or seller or the buyer’s unwillingness to accept the goods. Credit checks on overseas customers can be obtained through banks or companies such as Dun and Bradstreet. - Exchange Risk
Due to fluctuations in the exchange value of currencies, the amount you quote for the goods may not equal the amount you receive upon settlement, unless the original quote was made in Australian dollars. - Transfer Risk
The risk that exchange or trade controls in the customer’s country may prevent the customer making payment in a currency other than their own. Ask your bank for information on the conditions in your customer’s country.
The consideration of the risks involved will influence the type of payment collection mechanism you will use.
Lags between the time of purchase and the time of sale can be managed with the assistance of most large commercial banks.
Australian trading banks, merchant banks, and confirming houses all provide a range of services to assist exporters.
