Terms of Payment in International Trade
Transaction price and currency are essential terms of a transaction. It must also be defined what is included in the price. Terms of delivery have a material effect on the transaction price. Furthermore, possible discounts and bank charges have an effect on the total price. As a rule, the party who as the bank’s customer instructs the bank to carry out the payment is charged with the bank charges.
In practice, pre-payment of the transaction price is mostly requested in transactions, if payment is agreed to take place in installments. In relatively large transactions regarding purchase of machinery and equipment, it is common to request a pre-payment of 5 to 10 per cent of the transaction price. Often, the purchaser requires a bank guarantee for securing the pre-payment, should delivery not take place. In a cash payment, execution of the payment transfer often requires some time. Cash against delivery is a possible term of payment but requires in practice use of a Letter of Credit (see below). From the seller’s perspective, granting credit in the form of time for payment naturally means increased uncertainty for receiving the payment. When agreeing to additional time for payment, the due date of payment should be explicitly agreed.
Common methods of payment in international trade include:
foreign payment transfer;
foreign bill or check;
documentary collection and
Letters of Credit
As regards guaranteeing payment, checks and payment transfers do not offer much protection for the seller, since the purchaser is only bound by the terms of payment agreed in an agreement or invoice.
Documentary collection provides additional security, since the purchaser must acquire the documents entitling to possession of the goods, either against a cash payment or by accepting a bill of exchange. However, in case the purchaser for some reason is unwilling to receive the goods and does not redeem the documents from the bank, the seller is not protected.
A Letter of Credit (“LC”) is the most secure payment method for the seller, since the commitment to pay the purchase price is issued by a bank and not by the purchaser. Letter of Credit relates to the documents that entitle to possession of goods, and does not depend on the goods or the quality thereof. It is advisable for the parties to agree upon the terms for the Letter of Credit, which the seller must comply with in order to receive payment. The form of the Letter of Credit must be considered carefully. Banks should be able to provide useful additional information payment regarding methods.
The parties may agree on a bank guarantee or other collateral for credit granted by the seller. It is also possible to obtain insurance for credit risks. In addition, Finnvera offers export guarantees to Finnish exporters, to cover political and financial risks associated with export trade. Finnvera is an official Export Credit Agency (ECA), whose guarantees are secured by the State of Finland.