Getting paid: Understanding export transactions
Explore various methods of payment and decide which one is right for you.
Cash in advance
Receiving payment prior to shipping may be an optimal situation for you because the risk of non-payment disappears, and you add to your working capital. However, this is an insecure transaction for the foreign buyer, so finding one who is willing to pay up front is rare. Your buyer may consider prepaying a portion in the case of a custom or special order.
Letter of credit
A letter of credit is a secure transaction for you and your buyer. You are both required to set up the transaction through the international banking division of your respective banks. You receive payment directly from your bank, once all pre-determined conditions are met.
A documentary credit allows you to receive payment when you present the draft to your bank. Sight drafts allow for full payment on presentation, while term documentary credits calls for payments over terms (varied number of days).
In a documentary collection, you ship goods to your customer and send the shipping documents to a collecting bank. When your customer pays the bank, the bank turns over the documents. You then collect payment from the bank. This can be slightly risky, as the bank can't guarantee that your buyer will complete the transaction.
In an open account, you ship your goods and documents to your buyer before any form of payment is made. Open accounts generally call for payment over longer time periods (sometimes in excess of 90 days). An open account is an insecure transaction, as you will be taking on the credit risk of your buyer. Your buyer's reliability is of utmost importance in this situation.
Similar to an open account, with consignment, you take on a great deal of risk by shipping your goods to a buyer prior to receiving payment. In this case, however, the ownership of the goods remains with you until the goods are sold. This situation can benefit you, if you have a buyer that is reliable or if the domestic market for your product is slow.
Insurance for export transactions
You can hold up your end of the bargain, but will your foreign purchaser? Export insurance can protect you from the possibility that your buyer is unable to pay. Check out our resources for more information on export insurance.
More information on export transactions
Looking for more information on export transactions? Check out sections 8.4 and 8.5 of the Canadian Trade Commissioner Service's Step-by-Step Guide to Exporting.
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