There are a range of options and payment methods available to you whether you're exporting or importing a product.
An advanced payment is:
- used when the importer is required to pay for merchandise prior to shipment
- common practice when buyers and sellers do not have a close relationship, or there are adverse credit issues
- low risk for exporters, but a high risk option for importers who must trust the exporter will send quality products, and on time
- a great option when dealing with a new customer, but unlikely to be chosen by an importer if little or no trust exists.
An open account is:
- used when you ship the merchandise, and then bill the importer at a later date
- typically used where buyer and seller have a high degree of trust, the buyer is well established, has demonstrated a long and favourable payment record, or has been thoroughly checked for creditworthiness
- the most inexpensive payment method available, but it has it risks, the buyer may receive your goods, and then not pay.
Here's a tip
We strongly advise that you carefully examine the political, economic and commercial risks before issuing a pro-forma invoice to a buyer.
Letter of Credit
A Letter of Credit:
- is used when the importer's bank issues a document stating they will pay the exporter when the terms of the Letter of Credit are fulfilled
- offers security because it locks the importer into the contract – they can't renege or pull out of the deal
- guarantees payment for an export against receipt of specified documents because it's based on documents, not on the terms of sale or the condition of the goods sold
- requires that terms must be precisely met, or the Letter of Credit may be invalid and the exporter may not be paid
- may be;
- irrevocable – changes may only be made where both buyer and seller agree
- revocable – it can be changed without the exporter's agreement
- confirmed – payment may be made by a third bank in the event of default.
- is used when you hand over to your bank the task of collecting payment for goods supplied, which acts as an intermediary between buyer and seller.
- is less complicated and cheaper than a Letter of Credit, but riskier for exporters because there's no verification process, and limited recourse if the importer does not pay.
Here's a tip
We strongly recommend that you ensure your Letter of Credit is confirmed or guaranteed by an Australian bank, or take out export credit insurance. If you don't, you run the risk of a foreign bank not making payment to you.