By Sharon Johnson

The world of international trade includes many procedures that may seem strange to the domestic credit manager but are standard practice throughout the world. Credit terms is one of the areas that often confuse those who are new to international credit. Here are nine of the terms of sale commonly used in international trade.

1. Cash in Advance

   Cash in advance is least risky to the seller and most risky to the buyer. The advantages to the seller are clear: no credit risk, no foreign exchange risk, and low transaction costs. However, this term may be commercially noncompetitive: some countries may prohibit payments in advance, and the buyer must be willing to assume the risk of never receiving the goods. Additionally, the seller should allow sufficient time for the check to clear before sending the goods. Wire transfer is the quickest and safest way to receive funds.

2. Confirmed Irrevocable Letters of Credit

   Confirmed irrevocable letters of credit give the seller the benefit of transferring the risk of payment from the buyer to a known, confirming bank. The bank transmits funds upon the seller’s presentation of documents in conformance with the letter of credit. As an added level of comfort, a confirming bank- one which is known to the seller-adds its confirmation to the letter of the buyer’s bank (AKA the opening bank). The disadvantages to the seller are the high costs and sometimes complicated documentation. If a seller decides to ship under letter of credit terms, it is important to review the letter of credit carefully to ensure the viability of all shipping and documentation terms.

3. Unconfirmed Letters of Credit

   Unconfirmed letters of credit follow the basic form of confirmed letters of credit except that the credit risk is now entirely with the opening bank. While this is usually better than accepting the credit risk of the buyer, it does open the seller to country risk if the opening bank is in a foreign country. If an unconfirmed letter of credit will be accepted, it is important to investigate the creditworthiness of the foreign bank as well as the economic stability of the country in which it is located.

4. Cash Against Goods

   Here, the seller ships his goods to a warehouse, which holds the controlling documents until evidence of payment is produced. The seller has good assurance that payment will be made before the buyer receives the goods. However, the prudent credit professional takes care to be sure the buyer is able to pay for the goods once they arrive. Also, the seller should make a thorough investigation into the reputation of the warehouse. Additionally, the seller must be aware of local commercial laws to be sure that he is not opening himself up to local taxation.

5. Sight Draft Terms

   Sight draft terms allow the seller to send to an intermediary bank the controlling documents along with a draft payable at sight. The bank will hold the documents until the buyer pays the draft. Then, the buyer may take the shipping documents to obtain the goods from storage. The seller must determine that the buyer is able to pay for the goods once they arrive.

6. Time Draft Terms

   Time draft terms allow the buyer to obtain the controlling documents from the intermediary bank, but only after he has accepted a draft for payment at a certain date in the future. This offers some advantages over open account terms: the draft is evidence of indebtedness, and the bank acts as a somewhat interested intermediary. The credit department must conduct a credit investigation as thoroughly as if shipping under open account terms. With time drafts, the intermediary bank has no obligation to pass funds to the seller until they have been received from the buyer, at times months after receipt of goods.

7. Consignment Terms

   Consignment, or floor plan, terms are not unheard of in international trade. The advantages are that this method may be commercially competitive, and the seller may be able to recover goods not sold and paid for. However, the seller must be sure of local laws concerning transference of title and taxation. The cost of periodic inventory checks also may affect your decision about whether to use consignment terms.

8. Open Account Terms

   Open account terms are becoming more common as sellers are becoming more comfortable with international trade. Documentation is easy and transaction costs are low. The seller needs to thoroughly investigate the creditworthiness of the buyer as well as study the economic stability of the country of the buyer.

9. Extended Credit Terms

   Extended credit terms are available through various commercial and government programs. These can make the seller even more competitive and can provide some assurances of payment. Details are available from the seller’s bank, local credit association, or the U.S. Department of Commerce.

   Whichever credit terms you and the customer negotiate, it is important to know when title transfers and when physical control of the shipment goes to the buyer. Laws vary by country, as does the level of real security in warehouses. Even with payment methods that usually give good assurance of payment, the credit professional relies on that old saying: Know your buyer!

Sharon Johnson was National Account Manager, Veritas Business Information, Inc., now part of Coface North America.

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