Payment Procedures and Methods in International Purchasing

5.1 Introduction

To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms supported appropriate payment methods. Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer. As shown in figure below, there are four primary methods of payment for international transactions. During or before contract negotiations, you should consider which method in the figure is mutually desirable for both you and your customer.

5.2 Factors to consider in processing payment in international purchasing

  • Your cash flow availability and needs.
  • Your relationship with your supplier.
  • The economic conditions in the country to which you are importing.
  • Interest rates and currency adjustment factors.
  • Type of product.
  • Your supplier’s creditworthiness.
  • The terms your competitors are offering.
  • Your supplier’s demands.
  • Type of payment
  • The urgency of the transaction – are you under time constraints?

5.2.1 Methods of settling payments in international purchasing

The following are methods of settling payments in international purchasing:

  1. Cash-in-Advance

With 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.

  1. Letters of Credit

Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment 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. The buyer pays his or her bank to render this service. An 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. An LC also protects the buyer because no payment obligation arises until the goods have been shipped or delivered as promised

  1. Documentary Collections

A documentary collection (D/C) is a transaction wherethe 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. D/Cs 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.

  1. Open Account

An 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 f low and cost, but it is consequently the highest risk option for an exporter

5.2.3 Whatever terms of payment you negotiated you must always:

  1. Make sure they are understand two parties
  2. Have your supplier sign a document that indicates acceptance, such as the proforma invoice

5.2.4 Payment procedure in international payment

(a) Determine the amount of your international payment

If your paying for goods remember to check whether you need to ad shipping costs to the  total, as well as which party is responsible for the costs of international money transaction

     –If you are paying for services contact the provider of the services to decide who will pay for the costs of the international payment

(b) Inquire about making an international payment with your bank

(c) Choose the international payment method that works best for you and the recipient

(d) Make the international payment and notify the recipient that will receive it within the Specified time frame document.

  5.3  Conveyance documents in international purchasing

The following documents are required for international purchasing

  1. Original Commercial Invoice
  2. Packing List
  3. Original Bills of Lading – Two Original
  4. Original Certificate of Conformity
  5. Original Test Result/Report/Analysis
  6. Original Certificate of Origin for Preferential Trade Area Partners e.g. COMESA.
  7. Import Declaration Form and the Receipt
  8. Insurance Debit Note
  9. Importers Declaration(C52)

 

Revision questions

Example_. Describe the factors to consider in choosing a method of payment

Solution: One of the most important things to negotiate before closing on an import sale is how payment will be made. Many circumstances and priorities will influence your choice of payment method. A lot will depend on how much you know about financing a sale and how willing your supplier is to accept your terms and conditions. Other factors include:

  • Your cash flow availability and needs.
  • Your relationship with your supplier.
  • The economic conditions in the country to which you are importing.
  • Interest rates and currency adjustment factors.
  • Type of product.
  • Your supplier’s creditworthiness.
  • The terms your competitors are offering.
  • Your supplier’s demands.
  • The urgency of the transaction

Exercise 1. Describe the risk spectrum for sellers and buyers in international trade

EXERCISE 2. _Describe clearly the use of the letter of credit

EXERCISE 3. _Describe the demerit of the documentary collections method

Further reading

  1. Monczka, R. M., & Giunipero, L. C. (1984, Fall). International Purchasing:

2.Characteristics and Implementation. Journal of Purchasing and Materials Management , pp. 2-10.

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