Trade Basics For Importers - Payment
When it comes to paying for your goods, there are all kinds of things to consider. For instance, what method of payment you are going to use. In addition, you should be aware of any hidden costs that may be associated with your transaction. Below you will find useful information, to help guide you:
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Methods of Payment: The various methods you can use to make payments |
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More About Costs: Other importing costs to be aware of |
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Methods of Payment
If you are importing goods into Canada, you will likely want to secure the most favourable sales terms at the lowest purchase price. The exporter, however, must weigh the risk of credit losses against the need to offer competitive terms. For this reason, an important determinant of the payment method that you choose will be the level of risk associated with the transaction, as it is perceived by both parties.
When your company buys or sells products in foreign markets, you can use any one, or a combination of, four methods to obtain payment. Let's look at each in turn.
Advance Payment
An exporter receives payment before shipping goods or performing a service. Alternatively, an exporter may request a percentage of the sale in advance, with the balance settled using another payment method.
Best to use, when there is customer risk, when the buyer is not known to the seller.
Open Account Trading
An importer receives the goods or services before being required to make a payment. 30, 60, or 90 day terms are common.
Best to use, when there is an established trading relationship between the buyer and seller.
Foreign Collection
Through its own bank, the exporter instructs the overseas bank to obtain payment from the importer in exchange for agreed-upon documents.
Best to use, if there is a document of title, a collection provides some constructive control for the seller. For the buyer, there is evidence that the goods have been shipped before payment.
Documentary Letter of Credit
Issued by a bank on behalf of an importer, a letter of credit guarantees an exporter payment for goods or services, provided the terms of the credits are met.
Best to use, when there is customer credit risk or country political risk, it provides assurance for the seller as well as the buyer. Some governments insist on the use of an LC to pay for imported goods as a way to control foreign exchange.
More About Costs
While the growth opportunities afforded by trade are impressive, it is important to be aware of the added costs associated with exporting and for instance, you will need to consider shipping costs, insurance, and payment fees - as well as potential travel expenses, legal counsel, and market consultations. Costs vary considerably depending on where you are exporting to (or importing from), and what terms you have negotiated with the buyer (seller).
When the bank acts as an intermediary for your international payments, their fees vary based on much the same criteria - namely, the risk that the bank assumes on your behalf, and the expense of processing a complex transaction. While issuing or advising a Letter of Credit may carry a standard fee, services such as confirming, accepting and drawing are charged as a percentage based on the risk that the bank assumes. Refer to the section on types of Letters of Credit to learn more.
For more information about how our international trade solutions can benefit your business, contact an international trade specialist.
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