Export Finance

2. Payment Methods

The payment method you use has a significant effect on the financing you require and the level of risk to which you are exposed.

2.1 Open account payment is similar to offering credit to a UK customer.

Typically, the credit term (eg 30 days) starts once you despatch and invoice for the goods, in line with the terms of trade.

• You bear all the risks of offering credit, just as for a sale in the UK.
• You need to arrange finance to fund the whole of the transaction.
• There are no extra costs, other than those involved in any export transaction (see 1).

2.2 A documentary collection, where you draw up a bill of exchange, allows you to keep control of the goods and raise additional finance.

An overseas bank, acting on your bank's behalf, will only release the documents necessary for your customer to take possession of the goods once they formally accept the terms of the bill.

• There is the risk that the bill of exchange will not be accepted.You still have ownership and control of the goods, but in your customer's country.
• There is still a risk that you will not receive payment, unless the bill has been guaranteed by the bank ('avalised'). You will have a strong basis for pursuing legal action against the customer.
• The bill of exchange specifies any credit period you are offering.You can specify immediate payment, payment after a set number of days, or payment by a given date.
• Once the bill has been accepted, you can use the bill of exchange to raise additional finance (see 3.2 and 3.3).
• Both your bank and the overseas bank will charge a commission.Your terms of trade must specify who is responsible for paying these charges.

2.3 Documentary credits (or 'letters of credit') are the most secure method of payment (other than payment in advance).

Your customer arranges a letter of credit with its bank (the 'issuing bank') which pays a correspondent bank in the UK (the 'advising bank'), once you submit all the necessary documentation.

• An accurate and authentic 'irrevocable' letter of credit, verified by your bank, carries little credit risk.As long as your documents are accurate, the issuing bank guarantees to pay you within the stipulated time.
• By 'confirming' the letter of credit, your bank agrees to pay you if the issuing bank defaults. Your bank will charge a commission based on how creditworthy the issuing bank is.
• The letter of credit specifies any credit period you are offering.A 'term' credit, where payment is made after a set term (eg 30 days) will require you to finance the gap between delivery and payment.
• You can use a valid, current letter of credit to raise additional finance in a similar way to using a bill of exchange (see 3.2 and 3.3).
• Your customer is responsible for the cost of issuing the letter of credit.The customer will want to pass these costs on to you as part of the price negotiation.

2.4 You may be able to negotiate payment in advance for all or part of the shipment.

• You have no risks and bear none of the financing costs.
• There is no additional cost to you beyond the costs involved in any export transaction (see 1).