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AppArel exports
34 APPAREL May 2011
paymentInternationalAfter 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/exporters in the long run.
n exporter may negotiate excellent 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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terms
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payment
If the exporter ApproprIAtely selects
AnD ArrAnges the pAyment terms, he cAn sIgnIfIcAntly mInImIse
the rIsks InvolveD wIth pAyments...
It is therefore important to set up the right terms of trade before the transaction is carried out. If the exporter appropriately selects and arranges the payment terms, he can significantly minimise the risks involved with payments while accommodating the needs of the buyer.
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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 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.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.
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When to use Cash-in-Advance Terms: • Theimporterisanewcustomerand/or
has a less-established operating history• Theimporter’screditworthinessis
doubtful, unsatisfactory or unverifiable• Thepoliticalandcommercialrisksof
the importer’s home country are high• Theexporter’sproductisunique,not
available elsewhere, or is in heavy demand
Letters of CreditLetters 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.
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 Advance2. Letter of Credit3. Documentary Collection4. Open Account
Cash in advanCeWith cash-in-advance payment terms, the exporter can avoid credit risk
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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AppArel exports
38 APPAREL May 2011
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,
Transferable LC, LC payable at sight, LC payable on the maturity date,
doCumentary CoLLeCtionsA documentary collection (DC) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank),
along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. DCs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The draft gives instructions that specify the documents required for the transfer of title to the goods. Although banks 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 invoicedate/billofladingdate/thedraft date).
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overview of dP CoLLeCtionTime of Payment After shipment, but before documents are
releasedTransfer of Goods After payment is made at sightExporter’s Risk If draft is unpaid, goods may need to be disposed
of or may be delivered without payment if documents do not control title
overview of da CoLLeCtionTime of Payment On maturity of draft at a specified future dateTransfer of Goods Before payment, but upon acceptance of draftExporter’s Risk Has no control of goods and may not get paid at
due date
When to Use Documentary CollectionsWith DCs, the exporter has little recourse against the importer in case of non-payment. Thus, DCs should be used only under the following conditions: • Theexporterandimporterhaveawell-
established relationship• Theexporterisconfidentthatthe
importing country is politically and economically stable
• Anopenaccountsaleisconsideredtoorisky, and an LC is unacceptable to the importer
oPen aCCountAn open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. However, the exporter can offer competitive open account terms while substantially mitigating the risk of non-payment by using of one or more of the appropriate trade finance techniques, 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