Ask your bank for advice on payment methods for international trade
The government is not a stakeholder in payments between buyer and supplier. Ask your bank about conditions, risks, and costs related to the several international payment methods.
Determine your payment method
Letter of Credit
A Letter of Credit (L/C) is also known as a documentary credit. This payment method is the most reliable, but also the most expensive per transaction. This is why it is often used for large transactions. And for exports to, or imports from, an economically unstable country.
How L/C payment works:
The importing party opens an L/C at their bank. The bank commits to paying the outstanding payment for the goods, as soon as the exporting party meets the conditions stated in the L/C. Usually, this means that the exporter receives their money from the importer’s bank, after they have received the trade documents from the exporter’s bank. After that, the importer receives the trade documents and the goods. By using the L/C, the exporter does not have to rely on the importer to pay. The importer's bank provides extra security.
In certain circumstances, the exporter's bank can agree to settle the financial part of the deal. In that case, the exporter receives their money from their bank once the L/C terms are met. The exporter's bank agrees to carry all the risk (insolvency of the importer or their bank, uncertain conditions in the country of import, etc.) and the exporter is more certain of receiving their money. That is why this type of Letter of Credit is also called a confirmed L/C.
There are 2 kinds of blank payments:
- Blank payment before delivery. The buyer pays the supplier in advance, ensuring that the supplier gets their money – but the buyer runs the risk that the supplier does not deliver.
- Blank payment after delivery (open account). The supplier sends an invoice after the goods have been delivered. You agree upon a payment term beforehand. In this case, the buyer is certain to receive the goods, but the supplier has no guarantee that they will get paid.
If you have a bank guarantee, either the supplier’s bank or the buyer’s bank stands as a guarantor for the transaction.
- If the importer does not pay according to the agreement, their bank will pay the exporter. This way, the exporter is certain to receive their money.
- The other way around is possible too: if the supplier does not deliver according to the agreement, and a penalty clause was agreed on with the buyer and the bank. The exporter’s bank will then compensate the importer financially for any damages incurred.
Documents against payment / acceptance
When 2 business partners are not well-acquainted yet, this documentary collection method offers security to both the buyer and supplier. What happens is this: the supplier sends the trading documents to their buyer’s bank, via their own bank. The buyer needs these documents to import the goods, but they will only be forwarded:
- after payment. This is called Documents against Payment (D/P) or Cash against Documents (CAD);
- upon payment on the appointed due date. This is called Documents against Acceptance (D/A).
If you trade with a country that uses a different currency than in the Netherlands, you incur a risk: the currency may suddenly go down in value. Take measures to minimise this risk together with your bank. You can:
- include a currency clause in your quotation;
- cover the risk of currency fluctuations.
Make a risk assessment with your bank
You can cover currency fluctuations by agreeing upon a currency term transaction (trade with a fixed currency rate), currency options (buy or sell currency at a favourable rate), or a foreign currency account.
Disputes about delivery or payment
Do you have a dispute about the delivery of the goods or the payment? There are several ways to try and solve these disputes. The International Chamber of Commerce offers several services; you can also contact the International Council for Commercial Arbitration (ICCA).
Check the importer or exporter’s reliability in advance
For instance, ask for references. Find out if your buyer or supplier is listed in the Business Register. Or have a credit reporting agency research your buyer or supplier’s creditworthiness.