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Basics of Exporting - Pricing, Quotations, Payment & Collections Terms of Sale Methods of Payment Letters of Credit Pricing To establish an overseas price, you need to consider many of the same factors involved in pricing for the domestic market. These factors include competition; costs such as production, packaging, transportation and handling, promotion and selling expenses; the demand for your product or service and the maximum price which the market is willing to pay. There are three common methods of pricing exports:
In international trade, an export quotation includes the price and all of the principal conditions of a possible sale. Basically, the quotation describes a product, its price, payment terms, delivery period and the place of delivery. Many times it is advantageous to include gross and net shipping weight in this description. With this information, the buyer can make inland forwarding plans, and many times this measurement is helpful in the determination of import duties at the foreign port. The most common method of providing a sales quotation is the "pro forma" invoice. A pro forma invoice is not used as a form of prepayment, but rather to further describe products, price, payment terms, and delivery information so the buyer can arrange funds. Many banks provide their customers with a checklist for preparing this information. A pro forma invoice should include a statement certifying that the pro forma invoice is true and correct and a statement naming the country of origin of the goods. Also, the invoice should be conspicuously marked "pro forma invoice." It is good business practice to include a pro forma invoice with any international quotation, whether it has been requested or not. A Sample Pro Forma Invoice can be found in Appendix H and a detailed explanation of the terms involved can be found in the Export Documents section of this book. We have also included a Glossary of Exporting Terms in Appendix B of this publication for your reference. Generally, price quotations should state explicitly that they are subject to change without notice. If a specific price has been agreed upon or guaranteed by the exporter, the precise period during which the offer remains valid should be specified in the pro forma invoice. Since an entirely different set of terms is used
in international trade, the buyer and the seller must have a common
understanding of the terms of sale. Based upon the quoted terms
of sale, your responsibility for insurance coverage will be clarified
in terms called Incoterms™. These Incoterms™ are used
universally to determine who pays for what and when the responsibility
for goods transfers from the seller to the buyer. Information on
new terms can be obtained from the International Chamber of Commerce
CFR (Cost and Freight) — Seller quotes a price for the cost of goods, which includes the cost of inland and overseas transportation from the point of origin to port of debarkation. If additional charges outside of the agreed freight charges are charged, they fall to the account of the buyer. Insurance is the responsibility of the buyer. For example, you will see this as CFR Lagos, Nigeria. This basically means that your quotation will show the costs involved in landing the goods at the port of Lagos, Nigeria. C.I.F. (Cost, Insurance, and Freight) — Seller quotes a price for the costs of the goods, insurance, inland and overseas transportation as well as the miscellaneous charges from the point of origin to a named port of debarkation of a vessel or aircraft. F.O.B. (Free on Board) — Seller quotes a price for the cost of goods, which includes the cost of loading that good into trucks, rail cars, barges or vessels at a designated point. The buyer assumes responsibility for ocean transportation and insurance. F.A.S. (Free alongside ship at designated port of export) — Seller quotes a price for the cost of goods, which includes the charge for delivery of the goods alongside a vessel at the designated port. The seller is also responsible for the unloading and wharf fees. Loading aboard the vessel, ocean transportation, and ocean cargo insurance are the responsibility of the buyer. EXW (EX Works named point of origin) — Price quoted applies only at the point of origin and the seller agrees to place the goods at the disposal of the buyer at a specified place on a certain date or within a fixed period. All other charges are the responsibility of the buyer. Many times this term is seen in forms such as EXW Factory or EXW Warehouse. Using Terms of Sale in
a Quotation There are various methods of receiving payment for your exports. These methods include payment in advance, letters of credit, documentary drafts and open account. Payment in advance. This method is most desirable from the seller's standpoint because all risk is eliminated. While cash in advance may seem most advantageous to you, insisting on these terms may cost you sales. Just like domestic buyers, foreign buyers prefer greater security and better cash utilization. Some buyers may also find this requirement insulting, especially if they are considered credit worthy in the eyes of the rest of the world. Advance payments and progressive payments may be more acceptable to a buyer, but even these terms can result in a loss of sales in a highly competitive market. Letters of credit. A letter of credit (LC) is a payment method, which substitutes the credit-worthiness of a bank for that of a buyer. Thus, the importer, or buyer, applies to a bank for the LC. An irrevocable LC cannot be changed without the expressed permission of the exporter. If an irrevocable letter is confirmed by a U.S. bank, it virtually eliminates the foreign credit risk of an export sale. In part, a letter of credit also protects the buyer because a bank cannot pay the exporter until the exporter presents documents that comply fully with the terms and conditions of the letter of credit. Payment under a LC can be at sight, a certain number of days after sight, or by a date certain. At sight signifies that payment must be made within 72 hours, upon presentation of the required documents. Payment a certain number of days after sight means that the exporter will be paid sometime after negotiation or acceptance of the documents. Payment date is fixed by the terms of the LC. When deciding whether to use a LC, consider the additional cost of bank confirmation and related fees. A typical LC can cost $200-$300, including your bank's examination fee, which can range from 1/10 to 1/4 percent. The greater the value of your shipment the greater the fees are. Another factor is the possibility that competitors may offer payment terms more favorable to the buyer. Generally, the cost of a LC to the importer is significantly higher than the cost to an exporter. Due to these higher costs, some importers may not accept your payment terms. Consult an experienced international banker to determine which payment method is right for your business. Documentary Drafts. A "draft" is a written demand by the exporter directing the importer to pay to the order of a third party. There are three types of documentary drafts: sight drafts, time drafts and date drafts. A sight draft is used when the seller wishes to retain title and control of the shipment until it reaches its destination and is paid for. Before the order can be released to the buyer, the original bill of lading must be properly endorsed by the buyer and surrendered to the carrier of the goods. In actual practice, shipment is made on a negotiable bill of lading that is given to the shipper. The bill of lading is endorsed by the shipper and sent to the buyer's bank or to another intermediary along with the sight draft, invoices, and other necessary supporting documents specified by the buyer or the buyer's country. Some of the necessary supporting documents are packing lists, consular invoices or insurance certificates. The bank notifies the buyer that it has received these documents and as soon as the draft is paid, the bank will turn over the bill of lading, enabling the buyer to obtain the shipment. This method does involve some risk because the buyer's ability and willingness to pay may change between the time the goods are shipped and the time the draft is presented for payment. Also, there exists the risk of a change in the policies of the importing country. If the buyer cannot or will not pay for the goods, the return or disposal of the goods becomes the responsibility of the exporter. A time draft can be used to require payment within a certain time frame after the buyer accepts the draft and receives the goods. By signing and marking "accepted" on the draft, the buyer is formally obligated to pay in the determined period of time. When this signature is received, the draft is called "trade acceptance" and can either be kept by the exporter until maturity or sold to a bank at a discount so the exporter can receive immediate payment. There is a certain risk involved for the exporter because a buyer may delay payment by delaying acceptance of the draft or refusing to pay at its maturity. In most countries, an accepted time draft is stronger evidence of debt than an unpaid invoice. A date draft differs slightly from a time draft in that it specifies a date by which the payment is due rather than establishing a time period. When a sight or time draft is used, a buyer can delay payment by delaying acceptance of the draft, but the use of a date draft can prevent this occurrence. Open Account. Selling on open account carries the greatest risk for the exporter. Under this method the buyer does not pay for the goods until they have been received. If the buyer refuses to pay, the only recourse of the exporter is to seek legal action in the buyer's country. Thus, the open account method should only be utilized when there is an established relationship with the buyer and the country of the buyer possesses a stable political and economic environment. If your sales must be made on open account, the date upon which the payment is due should be stipulated. If the buyer pays in advance, he risks that the goods may not be sent. Similarly, if the seller ships the goods before he receives full payment from the buyer, he risks not being paid. To cover these risks, buyers, sellers, and banks use documentary letters of credit in international trade transactions. Under this method, the supplier requires these documents to be presented before payment is made. Essentially, a letter of credit adds a bank's promise of paying the exporter to that of the foreign buyer once the exporter has complied with all of the terms and conditions of the letter of credit. The foreign buyer or "applicant" applies for issuance of a letter of credit to the exporter or "beneficiary." When using a documentary letter of credit, parties base payments on terms contained within the documents, not on the terms of sale, nor the conditions of the goods sold. Before the bank completes the payment process, it verifies that all documents comply with terms in the letter of credit. If a discrepancy exists between the required documents and terms in the letter of credit, the non-complying party must reconcile the differences before payment can be made. Thus, the letter of credit mandates full compliance of documents as specified by the letter of credit. Confirmed Letter of Credit: The foreign bank often issues the letter of credit, while the U.S. bank confirms it. With confirmation, the U.S. bank adds its promise to pay to that of the foreign bank. U.S. exporters concerned about the political or economic risk associated with the country, in which the bank is located, may wish to obtain a confirmed letter of credit. An international banker or the local U.S. Department of Commerce district office can help exporters evaluate these risks and determine whether a confirmed letter is necessary. Alternatively, an "advised" letter of credit, in which, the U.S. bank gives advice without officially confirming may be appropriate. Irrevocable and Revocable Letters of Credit: If a letter of credit is irrevocable, the buyer and the seller cannot make a change unless both agree to it. In contrast, the buyer or seller can unilaterally make a change with a "revocable" letter of credit. Therefore, most exporters advise against the use of a revocable letter of credit. Letter of Credit at Sight: The terms of the letter of credit require immediate payment. Time or Date Letter of Credit: The terms of the letter of credit do not require payment until a future date. Banks charge fees, usually a small percentage of the amount of payment, for handling letters of credit. They also charge fees for any amendment made to the letter of credit after it has been issued. All quotations and drafts should explicitly state that fees are to be charged to the buyer's account, since the buyer generally incurs all fees. All terms of sale should be clearly specified, since payment is made according to the document's contents. For example, "net 30 days" should be specified as "net 30 days from acceptance" or "net 30 days from date of bill of lading" to avoid confusion and delay of payment. Likewise, the currency of payment should be specified as "US$xxx" if payment is to be made in U.S. dollars. International bankers can offer other helpful suggestions. An exporter usually does not receive payment until the advising or confirming bank receives the funds from the issuing bank. To expedite the receipt of funds, wire transfers may be used. However, for an additional charge, the exporter may be able to receive funds immediately by discounting the letter of credit at the bank. Exporters should consult with their international bankers about the bank policy towards letters of credit. Each documentary letter of credit must contain the following information:
Also, the most common documents required under commercial letters of credit are:
A Typical Letter of Credit Transaction
Tips on Using a Letter of Credit
Collections is the process in which an instrument or document accompanied by a draft is presented to an entity for payment. A draft is the negotiable instrument, which contains an order to pay. It must be signed by the seller and be payable at sight or within a certain time period. Purchased by your foreign buyers, drafts are used in order to pay the bills owed to you, the exporting company or individual. The most commonly employed type of collection is documentary collections, which were described under the previous heading of Methods of Payment. Local banks offer a selection of collection products. These products provide your organization with an efficient, cost-effective alternative to the in-house handling of collections. For international collections, banks offer lockboxes and electronic data interchange (EDI). There are two main types of lockboxes, the wholesale and the retail lockbox. The wholesale box is geared toward low volumes of high dollar remittances. Most times the bank will assign an individual teller to a specific group of customers so that he is trained in those customers' special needs and requirements. The retail lockbox service is created for those organizations that receive a high volume of low-dollar remittances accompanied by a scannable document. This retail lockbox system reduces in-house processing costs and the transactions are assigned a unique identification number, which creates a complete audit trail of the deposited checks. Electronic Data Interchange (EDI), the computerized exchange of information in a standardized format, is quickly becoming vital for a successful business. Customers of the bank can initiate electronic payments or collections accompanied by complete invoice and shipping information needed by a supplier to post the payment. The EDI provide an efficient, cost-effective alternative to handling incoming payments. These advantages include a quick response to trading partners who are using EDI, an improved accuracy of cash flow forecasting, improved control over expected payments or receipts, reduced internal processing and banking transaction costs, reduced time and cost of collecting, tracking and updating open receivables, the notification of incoming payments or collections and a fully automated update of your accounts receivable system. To determine the best type of collections for your company or for more detailed information about the various services offered, contact your local bank's international division. Back to Top
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