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close this bookExport Marketing for a Small Handicraft Business (Oxfam, 1996, 192 p.)
close this folder9 Despatching export consignments
View the document9.1 Exporting and importing formalities
View the document9.2 International transportation
View the document9.3 Methods of payment
View the documentSummary

9.3 Methods of payment

Receiving payment fully and promptly is the final objective of all the effort that has been made to obtain and supply an export order. It is not only the exporter who has an interest in it. Governments, too, require evidence that export consignments have been paid for and that payment has been made in foreign currency. The significance of foreign currency is that it can be converted internationally for the payment of imports. The currencies of most countries which produce handicrafts cannot be; they are what is called 'non-convertible' currencies. The government of the exporting country, through its national bank, converts the receipt from the overseas customer into local currency, which is what the exporter receives. In some countries exporters are allowed to keep a certain proportion of the payment in the currency in which the importer has made the payments. This is usually either to enable them to buy imported components of their export product, or to allow them to convert a percentage of the payment at a higher rate than the official one. Governments sometimes allow this in order to assist exporters in periods of high inflation when the official and street values of their currencies are widely different.

Failure to receive payment within the stipulated time—which varies from country to country—can cause considerable problems for an exporter, on whom the responsibility lies to collect it from the customer. Exporters can and do receive fines, or lose their export registration. This is all the more reason to establish a secure method of payment.

An exporter can consign goods and send the documents to the importer directly. This removes any form of guarantee that payment will be made. It is a system to be used only with well-established customers in whom you have complete trust; or, of course, if a full pre-payment has been made. It should never be used with new customers, and especially not in countries where you are not otherwise trading. Sadly, there are many small handicraft businesses which have had bad experiences after sending consignments overseas on misplaced trust without taking payment guarantees; sometimes they have never been paid. There is risk in all business. If you are going to seek new customers, you inevitably risk meeting a dishonest one. If an importer has your goods and will not pay, you are in an extremely weak negotiating position. Legal proceedings would probably be unrealistic. You cannot, on the other hand, ask all customers to pay fully in advance. You will not get many orders that way. So you need to take precautions.

There are two main ways of protecting yourself. One is to insist that, when the order is confirmed, the importer makes a legally binding commitment to pay at the time of shipment. This can be drawn up so that the exporter automatically obtains the payment from a bank on presentation of the export documents. This is the documentary credit (better known as letter of credit) system. The other method is to consign the documents or goods or both not to the importer, but to the importer's bank, under instruction that the goods be released only against payment or a binding promise to pay. This is the system of documentary collection. The first method is fairly safe for the exporter. The second one could fail if the importer goes out of business or refuses to accept the consignment. Both methods rely on the integrity of banks.

Documentary credit

The letter of credit system is 'a written undertaking given by a bank on behalf of the buyer to pay the seller an amount of money within a specific time, provided the seller presents documents strictly in accordance with the terms laid down in the Letter of Credit On receipt of the order confirmation, the importer instructs its bank to open a credit for the required amount in favour of the exporter's bank. After shipment, the exporter presents all the documents to its bank, and provided the terms of the letter of credit have been adhered to, the bank pays immediately. The exporter, therefore, receives payment upon making shipment, irrespective of when the goods arrive with the importer. There can be further advantage to the exporter, in that in some countries credit facilities are made available at favourable rates of interest to exporters holding letters of credit.

A documentary credit can be revocable (which means that the importer can cancel or amend it at any time until the payment to the exporter has been effected), or irrevocable (which means that the exporter and importer must both agree to any amendment). It can also be confirmed (which means a guarantee is given to the exporter by its bank that payment will be made even if the importer's bank should fail to pay) or unconfirmed (in which there is no such guarantee). Hence, a confirmed, irrevocable letter of credit is a guaranteed system of payment. Many exporters insist on it for that reason.

Importers like it less. In the first place, it is an expensive means of payment. An administrative charge is made to set it up; and the importer has also to pay interest to the bank for the reserve on the bank's funds before payment. Second, there is more work and expense if the letter of credit has to be altered at any time. This is quite common, especially if an exporter is delivering late, as the letter of credit states a time limit. Oxfam Trading has had several experiences of needing to alter letters of credit to suppliers, sometimes just because a vessel did not sail on the due date, not through any fault of the exporter. While we always pay our suppliers by the method they prefer, we do not encourage them to choose the letter of credit system, which represents the lowest form of trust between seller and buyer.

Documentary collection

In this system the exporter similarly makes the claim for payment through its bank by presenting the documents to it after shipment. In this case, the credit has not already been set up by the importer, so that the exporter's bank does not make an immediate payment. Instead, it sends the documents to the importer's bank, which either makes the payment before releasing the documents to the importer, or releases them against a legally enforceable promise to pay.

When a documentary collection system is employed, the claim for payment is made on what is called a bill of exchange. The exporter, who raises this, may request immediate payment, or may alternatively agree to offer a period of credit to the customer. Immediate payment is claimed by a bill of exchange payable at sight. This system is commonly called 'cash against documents'. In this case, the importer's bank makes the payment before releasing the documents. Credit for a fixed period can be offered by a term bill of exchange, which defines a date in the future when payment is due. The importer is required in that case to sign an acceptance of the bill in order to obtain the documents. In this way, the provision of credit to an overseas customer does not necessarily entail risk of non-payment. The signed acceptance is legally enforceable in the courts of the importing country, and the bank will make the payment at the due date.

Documentary collection is an effective method of payment for consignments sent by sea freight. It suits the exporter because it offers the security of bank guarantees. Because the bill of lading gives legal title to the goods, the importer must either pay or promise to pay before the goods can be obtained. It suits the importer as well, because payment is made near the time of receiving the shipment.

The system is less suitable for other transportation methods. When a consignment is sent by air freight, the importer needs the documents very quickly, because the goods will arrive in a few days. If they are sent via the exporter's bank to the importer's bank, the delay may well lead to demurrage bills for the importer. If the exporter sends them directly to the importer, either attached to the consignment or separately by courier, then the importer will be happy, but the exporter loses any security that payment will be made. The way around this difficulty is to despatch the documents together with the goods, but to consign both goods and documents to the importer's bank, with a bill of exchange. There will be no delay in clearing the consignment, but the importer may obtain the documents to do this only on payment or promise to pay. Some countries will only permit exporters to despatch documents with the consignment if this system is being used. What happens is that, in effect, the despatch is delayed a few days in order to prepare the bill of exchange which accompanies the goods. A parcel sent by post can be consigned to the importer's bank in exactly the same way.

Payments in advance

It is common practice for Oxfam Trading's suppliers to request some proportion of the total payment in advance. This is not so much for reasons of security, but in order to obtain working capital. Money is needed to buy raw materials or pay wages during production of the order. If importers are willing to pay something in advance, then so much the better. The payment of the balance can still be claimed by documentary collection if required. If an advance has been paid, it is important to delete this amount from the final invoice.

Oxfam Trading offers to pay in advance for sample consignments from new contacts. It is cheaper and easier to do this than to administer documentary collection for very small amounts of money. If a potential new customer orders samples, it is reasonable for an exporter to request prepayment. For this purpose a proforma invoice needs to be sent, preferably adding the transportation cost.

Open account

This means trusting the customer! Goods and documents are consigned directly to the importer, and payment is awaited. Oxfam Trading conducts a lot of its business in this way. It is the method which suits us best, but we do not encourage exporters to use it for all their exports, for they might extend the trust unjustifiably to a less reputable importer.

With documentary credit or collection, money is transferred from the importer's bank to the exporter's. Advance or open account payments may also be handled in this way. It is by far the safest means of sending money overseas. Transfers may be effected by mail or by telex. The latter is quicker, and it is Oxfam Trading's normal method. In order to make transfers, an importer must, of course, have the full bank account details of the exporter. This information should be provided to any new customer at the time of confirming an order.

Banks have their own system of transferring money, through correspondent banks. The process can take a long time. We have received complaints from suppliers that payments have been delayed for several weeks after instructions have been given to our bank. It is a regular conversation topic between our payments office and our bank, but in practice we cannot control the route by which the money is transferred between banks.

Another method by which importers can pay exporters is by purchase of a draft. This is an international postal order in the currency of the exporter's invoice. It is only as reliable as the postal system. Drafts can get lost in the post, or even fall into the wrong hands and be cashed. They are not available in all currencies. It can also take time for a draft to be credited after presentation to the exporter's account. Oxfam Trading prefers not to use this method.

Payments for export consignments can be made only to the exporter, who raises the invoice. This is because it is the exporter who is liable to prove receipt of foreign currency payment. If a production unit is sending its goods through an exporter, then it is dependent on that exporter for settlement. The importer cannot bypass the exporter and pay directly to the producer.

It is possible to export handicrafts not against payment but under a countertrade arrangement. This is where an importer sends goods of part or wholly equivalent value to the exporter. It can be useful to exporters who need to import equipment for their production.