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Before committing to sell, an export business needs to understand the terms of the sale, along with the risks and costs to both parties.
Most international businesses follow the Incoterms rules under the International Chamber of Commerce, the most commonly agreed upon commercial terms of sale within the international business community. In addition to following these terms, international proprietors need to understand how their customers' payment type can impact their bottom line.
Here, Roberta Ford, director of the U.S. Department of Commerce's U.S. Commercial Service in Columbus, Ohio, explores the pros and cons of different international payment methods in order of most to least preferable.
— Roberta Ford, director of the U.S. Department of Commerce’s U.S. Commercial Service
With this payment method, the export business and foreign customer agree on the price of the goods up front, including any shipping and other costs. The customer pays in advance, by cash or online wire transfer with the help of a financial services company, such as a trusted online foreign exchange provider. Once payment is received, the exporter sends the product to the customer.
An online wire transfer payment is best, according to Ford. "A payment by check can mean a collection delay or nonpayment due to insufficient funds," she says.
To minimize the cost of sending money overseas, businesses can use a free online FX currency converter that shows real-time rates to stay on top of the foreign exchange market.
For orders under $3,000, the foreign customer may choose to pay using a credit card.
In this case, it's important to get the client to agree in writing that they've received and accepted the export products, since some clients will use credit cards as a way to back out of a purchase, says Kristina Bovay, a small business advisor in Vancouver, British Columbia, and principal of Voice Marketing Inc., which helps small businesses in Canada.
First, a customer agrees to a letter of credit with his or her bank, and the letter of credit is confirmed by a U.S. bank. The customer's bank will send a payment to the exporter's bank once paperwork is complete. Both banks charge a fee for this service, but letters of credit shift the risk from the business owner to the bank and free up the business's credit line.
"Another method used when the U.S. exporter wishes to retain title to the goods until it reaches its destination and payment is received is called a 'sight draft,'" Ford says. "Before the shipment can be released to the buyer, the document that evidences title must be properly endorsed by the buyer and surrendered to the carrier. This method would only be used for ocean shipments, because when shipping via air, waybills do not need to be presented for the buyer to claim the goods."
For this, an export business invoices the foreign customer with an international payment due date after the goods have been shipped, and possibly already delivered. Although there are no bank fees, it's the riskiest form of payment for the exporter, but the safest for the buyer. In international trade, the more liabilities and risks that can be shifted to the other party, the better.
It's important to get export insurance for open account payments, which will cover up to 95 percent of the exporter's costs if the customer fails to pay, says Papa Omar Diop, director of the International Trade Assistance Center at Columbus, Ohio's Small Business Development Center. Export insurance can be obtained from the Export-Import Bank of the United States, the official export credit agency.
Example: 1USD = xx INR
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