Payments and Insurance

Payment (i) Currency It is important to remember that when you import or export goods, you may be required to pay (or accept payment) in a number of currencies. You need to arrange with the supplier or buyer in advance who will bear the costs of exchanging the currency (E.g.: From Euros to Pounds); this can affect the costs a considerable amount and may need some negotiation to find the fairest option. In most cases the buyer (importer) will pay the currency conversion charges, although it now a lot easier for payment to be converted as it enters the bank account (particularly with Euro payments). (ii) Payment methods Open Account (OA) An open account is where you credit check the buyer, and organise an appropriate credit limit and credit period for payment. When you ship the goods, the payment is due a set number of days after. This type of payment method is normally used only in strong or long-term business relationships, where you can be sure that the buyer will pay. This type of payment is preferable to small businesses when importing, helping you keep positive cash flow. It is however much more preferable to have payment in advance when exporting. Documentary Collection (DP, DA) This where the exporter/seller sends a number of documents to the customer’s bank; when the customer pays in full, the bank gives them the import and release documents (DP). In some cases, the customer will sign a ‘bill of exchange’, which sets out a specific number of days to pay (E.g.: 90 days after collection). When the customer signs the bill, they will receive the import and release documents (DA). This is an effective method of payment for small businesses, as it helps provide security for both the buyer and seller. You must be sure however, if allowing a number of days to pay, that the customer is reliable and creditworthy. Otherwise you may be left needing to claim in court to retrieve your money, which is especially difficult with foreign companies. Documentary Letter of Credit (LC) This is where the customer’s bank provides a ‘letter of credit’, which promises to pay the supplier as long as the terms are met (and the bank has the money to pay) (ILC). There s also a ‘confirmed irrevocable letter of credit’ (CILC). This is a promise by a UK (or a large world bank) to pay the supplier, and is even more secure than an ordinary letter of credit. A letter of credit is the most secure way to be paid, but you must be careful to ensure that all documents related to the sale are correct, as a serious mistake can make the letter of credit worthless. Payment in Advance This is the most preferable method of payment for a small business looking to export. It helps keep your cash flow positive, and minimises your risk in exporting. The main drawback is that few buyers will be willing to pay in advance, in case of problems with the order. One solution is to arrange for part payment in advance. This provides some security that you will be paid, and helps to fund the cost of production and shipping; whilst allowing the buyer to check the quality of the goods before parting with the rest of their money. Payment in advance is not preferable if you are importing, but if you are left with no other option, be certain to take Goods in Transit Insurance to help cover you against any problems. Terms Of Delivery It is essential that all importing or exporting be covered by an effective set of delivery terms. In the event of a late or damaged delivery, the costs to the importer could be huge. Incoterms are a set of international standard definitions that allow terms to be set without the risk of confusion, even when translated into different languages. Incoterms help to set out fair compensation rules in the event of a late, damaged, or missing delivery. They can also set out fair payment details once a complete delivery has been made. More information on Incoterms is available at the International Chamber of Commerce Incoterms website. Insurance One way to protect your business against a damaged or late delivery is to take out Goods in Transit Insurance. This covers the goods against damage, loss, late delivery or no delivery while in transit, providing cover against the damage that a late delivery can cause to a buyer. This is particularly important if you are an exporter, as the cost of replacing goods will usually be very high, as well as the cost of the business you may lose because of the problem.