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One of the most sensitive but also most important aspects of exporting to the USA is making sure that you will get paid. The methods of payment have evolved and changed over many years to give a certain amount of protection to both the buyer and the seller.
There are four main ways that an exporter can be paid. If you are the exporter the best is prepayment, letter of credit, draft, and open account. If you are an importer you want these types of payment in that reverse order.
Prepayment
Prepayment, also called cash in advance, is the best for the exporter. There is little risk to the exporter. The importer, however, runs the risk of the goods being delayed or not being shipped at all and the documents necessary for importation not being sent. Forms of prepayment include credit card, bank wire transfer, and international certified check sent before shipment is made.
Letter of Credit (L/C)
One of the most common forms of payment is the Letter of Credit (L/C), also sometimes called the documentary credit. When the L/C has been issued the importer cannot change his/her mind. They cannot change the L/C unless the exporter agrees. So the exporter can feel assured that as soon as the shipment is sent, together with all the documents filled out correctly, the exporter will get paid. At the same time, the importer knows that the exporter cannot take the funds until the goods are shipped.
It is important to understand that an L/C is not a guarantee that the exporter will get paid. The L/C is says that the exporter will get paid if the L/C is conformed to exactly. If there is one mistake, error, or something left out the documents then the exporter is paid only is the importer agrees to excuse the mistake. Everything must be done just right.
Drafts
A draft, also called a bill of exchange, is the same as a foreign importer’s check. The risk for the exporter is that the check may not have funds in that account to cover it.
Exporters use a sigh draft when they want to keep title of the shipment until it arrives at its destination. The ocean bill of lading, which is sent by the exporter to the importer through the bank is endorsed by the importer and then given to carrier. This allows the importer to take title of the shipment. The risk for the exporter is the importer’s ability to pay may change from the time the goods are sent and the time the exporter takes the draft for payment.
By using a time draft the exporter is giving credit to the importer. A time draft says that payment is due within a certain time after the importer receives the goods. The importer writes “ACCEPTED” on the draft and then is required to pay the amount due at the time stated on the draft.
Exporters use date drafts when they want to specify a date that the payment is due. The advantage is that the importer cannot delay accepting the draft hoping that he/she can delay making the payment.
Open Account
With an open account the importer agrees to pay for the shipment after a certain amount of time. Usually this is 30, 60, or 90 days. The risk to the exporter is that the importer will not pay. Or perhaps the company goes out of business, the managers change their minds, or the company does not have the money. This type of payment is usually limited to importers who are well known by the exporter and have doing business with each other for a long time.
The exporter ships the goods, sends the importer a bill, and payment is made by the importer at the agreed upon time. Most payments are by bank wire transfer. Many very large importers will give orders only when the payment terms are open account.
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Regardless of the type of payment you accept you should know the reputation and reliability of the importer. More information on this can be found at How To Know If A US Importer Is Reliable.
