Tips for Choosing Payment Terms and Securing Payment Guarantees

1. Selection of Payment Terms: In export trade negotiations, payment methods and timing should be carefully discussed. Generally, there are three options available, each offering different levels of payment security.

Payment in advance;

Payment by irrevocable letter of credit (i.e., a documentary credit);

Payment by bill of exchange, or open account. The advantages and reliability of these three payment methods decrease progressively for the exporter. It is crucial to have a thorough understanding of the buyer's creditworthiness beforehand. There are various ways to obtain this information: consult your own bank, seek advice from commercial credit rating agencies, or investigate the buyer's financial status. For example, inquiries can be made through trade organizations, the commercial departments of embassies or consulates, marketing agents, and other companies who have business dealings with the buyer. Generally speaking, if there has been a business relationship for over a year, the payment method can be chosen based on one's own experience.

Firstly, if the buyer has a good payment history, to facilitate large-scale transactions, one could use foreign bill collection through a bank, or even open a trade account on a credit basis with periodic settlement. Of course, the choice of payment method also depends on the value of the goods and the company's own financial condition. Additionally, whether the political situation in the buyer's country is stable or if there is credit insurance available are factors an exporter must consider. Sometimes, even the buyer's commercial culture and mutual language barriers become critical factors, as "misunderstandings" can lead to deteriorated relations and payment difficulties. The aforementioned political situation requires special attention. Government changes, strikes, or even certain government actions can hinder the buyer from fulfilling the payment agreement. For instance, the introduction of an import licensing system, freezing of foreign exchange for import payments, or strikes by port or inland transport workers can impede the buyer's ability to comply with the payment agreement. These issues must all be considered when selecting a payment method.

Secondly, concerning letters of credit. They provide sufficient payment assurance for the seller, but also increase costs and formalities for both parties. The buyer needs to provide financial guarantees to ship goods from abroad, so buyers are generally reluctant to use this payment method. Thirdly, concerning payment in advance. For the seller, payment in advance is the most advantageous method, especially when dealing with the buyer for the first time, or when the buyer's country is politically unstable or economically chaotic. For the buyer, although advance payment usually facilitates the early shipment of goods, they have no assurance of actually getting early shipment or guaranteed quality. Therefore, buyers typically require a bank guarantee from the seller before making an advance payment, which in turn increases the seller's financial burden. Consequently, once a normal trade relationship is established, both parties tend to be unwilling to use this method.

Finally, regarding payment by bill of exchange. Here, the seller acts as the drawer, issuing a written unconditional order to the buyer, who is the drawee, to pay a fixed amount. This bill can be payable on demand or not, with the funds being withdrawn on a predetermined future date.

2. Comparison of Various Payment Methods like Bills of Exchange: Bills of exchange can be further divided into "clean bills of exchange," which are ordinary bills without accompanying documents (such as bills of lading), and "documentary bills of exchange," which are L/C-backed shipping bills. Clean bills are used when transport documents are sent separately, or when payment terms require the buyer to accept the seller's draft before production or shipment. Documentary bills differ, as they are accompanied by supporting documents like bills of lading. The bank in the buyer's country will only release the supporting documents, allowing the consignee to take delivery of the goods, upon confirming payment or acceptance of the bill. Thus, documentary bills provide better payment assurance for the seller than clean bills. Most countries have, however, provided legal guarantees for bills of exchange, allowing sellers to seek legal recourse if the bill is dishonored. Using bills of exchange is straightforward and less costly, convenient for the buyer to take delivery while providing the seller with payment assurance. This is only reliable, however, if the documents include a document of title nominating the consignee.

The "Cash against documents" payment method works as follows: after the seller presents the bill of lading or other proof of ownership to the buyer or their agent, and its validity is confirmed, the payment is made to the seller or their agent. This method is less reliable than a bank draft. Open account trading, where the seller extends credit to the buyer based on trust that they will pay by the agreed date, is, if the buyer does pay on time, the simplest method requiring minimal effort and fees. The problem for the seller is that, once the goods and documents are shipped, they have no secured payment guarantee. Thus, thorough prior knowledge of the buyer's creditworthiness is indispensable. Their status needs to be dynamically monitored to protect against changes. Open account trading is quite common within the European Union (EC). International trade generally differs from trade within the EU, and the political stability of the buyer's country must be assessed. Commercial credit insurance is recommended. It can compensate the seller in case of payment default, usually covering 80% of the invoice value initially, with the balance paid after collection from the buyer, less certain fees.

There is another often-overlooked payment method, which is to consign the goods to a forwarder's overseas office or their agent, with instructions to release the documents of title only when payment is received. After payment is received and remitted to the forwarder's office handling the shipment, the pre-agreed commission is deducted before the funds are turned over to the seller. It is important to note that the
forwarder's creditworthiness must also be checked in advance. From the above introduction, to ensure smooth export marketing operations and secure payment collection, an export trading company must employ knowledgeable, experienced, and capable staff specialized in foreign trade. Attention must be paid in foreign trade practice to the timeliness and accuracy of documents. It is no exaggeration to say that often-neglected expertise in export logistics and transportation is, for foreign trade management departments, a valuable intangible asset.