Import Finance

3. Payment Methods

3.1 Open account trading is common within the EU and for suppliers with whom you have an established relationship.

The supplier offers you credit (eg 30 days) in the same way as a UK supplier.

• Confirm exactly when the supplier expects to receive payment (eg 30 days after you assume control of the goods in accordance with the terms of delivery).
• You may be able to negotiate a price discount by offering to pay sooner (see Negotiating a purchase).
• Open account trading may also be a possibility when you are acting as the supplier's agent (eg as a car dealer), particularly if goods are consigned to you or sold on a sale or return basis.

3.2 Suppliers may want to use documentary collections to reduce their risk or improve their financing position.

The supplier draws up a bill of exchange. You can negotiate the terms of the bill (eg payment 'at sight' or after 30 days) depending on how you and your supplier want to share the financing burden.

• For a bill that is payable at sight, payment becomes due when the bill and shipping documents are presented to you (usually through your bank).
• For a term bill (eg 30 days), you accept the bill on presentation, guaranteeing to make payment when due.
• Once you accept a bill, you have a contingent liability that will reduce the amount of credit available from your bank.
• Your supplier may be able to use an accepted bill as a means of raising finance.
• The responsibility for bank charges will be agreed in the contract with your supplier and noted on the bill of exchange.

3.3 Suppliers may want to use a documentary credit (or letter of credit) to minimise their risk. You apply to a bank to open a letter of credit. The bank agrees to pay the supplier once the conditions of the credit are met.

• The conditions will require delivery of the correct goods, on time, in the right place.Using a documentary credit allows you to ensure that your supplier provides the paperwork you need.
• Your supplier will usually require a 'confirmed, irrevocable' letter of credit.This is the most secure form of payment. The banks guarantee to pay, even if you, the customer, default.
• Once the overseas bank is satisfied that the terms of the credit have been met, it will pay your supplier.
• A 'term' documentary credit lets you make payment after a set term, and usually involves the issue of a bill of exchange.The cost of the documentary credit will include interest charges to cover this.
• You have to pay your bank for issuing the documentary credit.
• Your bank will reduce the amount of other credit available to you.
• Your supplier can use the documentary credit as a means of raising finance.
• If your supplier requires the protection of a documentary credit but would otherwise be prepared to offer different terms, you can use a standby letter of credit.

3.4 Occasionally a supplier may ask for payment in advance for all or part of the order. This is most often used for one-off purchases of low value.

As well as carrying the financing burden, you are at risk from unscrupulous or incompetent suppliers.

• You have little or no protection if the goods are faulty or never arrive.Asking only for a deposit and never sending the goods is a well-worn trick.