Make payment arrangements for your goods with the importer. There are several options, such as the Letter of Credit (L/C). You can reach an agreement on the moment of payment, collateral costs, and risks for you and your buyer. The payment traditions per country vary as well.
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Ask your bank for adviceThe government is not a stakeholder in payments between you and your supplier. Ask your bank about conditions, risks and costs concerning 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 one per transaction, which is why it is often used for large transactions. Or for exports to an economically instable country.
How it 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 you receive your money from the importer’s bank when they have received the trade documents from your 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 take all the risk (insolvency of the importer or their bank, uncertain conditions in the country of import) 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.
Blank paymentsThere are two kinds of blank payments:
- Blank payment before delivery. Your buyer pays in advance, ensuring that you get your money – but the buyer runs the risk that you don’t deliver.
- Blank payment after delivery (open account). You send 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 you have no guarantee that you’ll get paid.
Bank guaranteeIf you have a bank guarantee, either your bank or the buyer’s bank stands as a guarantor for the transaction.
- If the importer does not pay according to agreement, his bank will pay you. This way, you are certain to receive your money.
- The other way around is possible too: If you don’t deliver according to agreement, and you have agreed upon a penalty clause with your buyer and bank. Your bank will then compensate the importer financially for any damages incurred.
Documents against payment / acceptanceWhen two business partners aren’t well-acquainted yet, this construction offers security to you and your buyer. What happens is this: you send the trading documents to your buyer’s bank, via your bank. The buyer needs these documents to import the goods, but they will only be forwarded:
- after paying. 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).
Foreign currenciesIf you trade with a country that uses a different currency, you incur a risk: the currency may suddenly go down in value. Take measures to minimize 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 bankYou 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 paymentDo 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’s reliability in advanceFor instance, ask for references. Find out if your buyer is listed in the commercial register. Or have a credit reporting agency research your buyer’s creditworthiness.