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Make payment arrangements for your goods with the exporter. 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.
Ask your bank for adviceThe government is not a stakeholder in payments between you and your buyer. Ask your bank about conditions, risks and costs concerning the several international payment methods.
Determine your payment method
Letter of CreditA Letter of Credit (LC) 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 imports from an economically unstable country. It is usual for your bank to withhold payment of your supplier until they have received the trade documents from the supplier’s bank. After that, you receive the trade documents and the goods.
Blank paymentsThere are two kinds of blank payments:
- Blank payment before delivery. You pay in advance. Your supplier is assured of receiving his money – but you run the risk that he doesn’t deliver the goods.
- Blank payment after delivery (open account). Your supplier sends an invoice after you have received the goods. You agree upon a payment term beforehand. In this case, you are certain to receive the goods, but the supplier has no guarantee that he’ll get paid.
Bank guaranteeIf you have a bank guarantee, either your bank or the supplier’s bank stands as a guarantor for the transaction.
- If you do not pay according to agreement, your bank will pay the exporter.
- The other way around is possible too: if the supplier doesn’t deliver according to agreement, and you have agreed upon a penalty clause with your supplier and his bank. His bank will then compensate you 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 supplier. What happens is this: the supplier sends the trading documents to your, via his bank. You need 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.