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Risk and Control of Foreign Trade payment terms

Posted by: Jenny | 2016-08-26 10:45:54

Special payment terms refers to the payment terms except T/T BEFORE SHIPMENT and L/C AT SIGHT. The more common one will will be the following:


1. T/T AGAINST B/L COPY.

2. LC XX DAYS.

3. OA XX DAYS.


First, T/T AGAINST B/L COPY.


Currently this payment term has been gradually operated the "payment before arrival." When the buyers persuade sellers to accept this payment term, they said, "Relax. You get the Bill of lading in your hands I can not get the goods, so you have nothing to worry about." But let us recognize what the potential risks of this payment term:


1.Once the customer refused to pay, the seller must bear the sea freight of return.


2.Some destination port can not accept returned.


3.When returned, if there are costs incurred in the destination port, this cost will be borne by the seller.


4.Some destination ports do not allow to return if the goods has piled up over a certain period and it will be mandatory for auction.


5.The forwarder may be privately release the B/L to the buyer without the permission of of the seller.


6.Some countries maybe pick up the goods only with the B/L copy.


This six article seems to be risky, but actually are based on a prerequisite "buyers refuse to pay". So generally for such payment terms, we usually make the following preparations:


1.Examine the creditworthiness of the customers, such as to analyze customer's financial report, to understand the assessment of customer's supply chain, and to provide such payment after cooperating with the customer for a period of time.


2.Learn the rules and regulations of the destination port and make sure if there exist regulations that are detrimental to the seller.


3.Try the best to increase the proportion of payment before shipment.


4.Try to get the sea freight before shipment.


5.Try to use your own shipping agent. It needs to be stated that the use of CIF and own shipping agent are different. Because some customers will recommend his shipping agent to the sellers by saying that the seller’s agent’s price is too high, and the seller directly contact and pay the freight to the agent. This is similar to FOB in the risk management and control. The reason why we suggest to use our own forwarder is that in using the buyer’s forwarder, some forwarder may be issue the B/L to the buyer without the seller’s permission while this operation is actually very simple.


6. If really feel necessary, let Sinosure intervene, even if ultimately not insured, it will be better to investigate the customer's credit situation.


Second, usance LC


The risk of LC is not lay on the long-term or at sight, but that the letter of credit itself, because the long-term impact on financial pressure to sellers which can be resolved by the financial instruments such as "forfaiting". A friend experting in senior documents once said, "There will never be the LC that does not have any discrepancies." We do not know if it is real, but we find that there is always some credit terms exit to surprise the sellers, such as:


1. LC requires Master B/L while actually it can only offer freight B/L. 

2. LC requires a FORM A, but in fact it only can provide the C / O.

3. LC requires third party inspection report, but ultimately it can not be provided.


These terms are the trial for the seller's ability of checking the documents. Here are the following suggestions:


1.Require the buyer to provide the LC Draft for your confirmation before he open the original LC.


2.Minimize discrepancies. There is the risk of customer's refusing to pay, moreover, the most important point is that each discrepancy cost money.


In addition, in the past, the LC opened by some countries or banks with poor credit ratings, such as Venezuela, the company won't accept it. It is not know whether this can keep up with the times, only for the sellers' reference.


Finally, OA, OPEN ACCOUNT.


For some countries, OA has almost become the mandatory payment term, because the whole country commercial chain operate by CREDIT. The consumers use credit card for installment while the dealers keep the upstream funds, so the importers are bound to transfer the pressure on the exporters. It is believe that all of the companies exported by OA payment method must have Sinosure intervention that declined payment required 80% penalty, and 90% for non-payment. This has made this seemingly risky payment terms not so much risky except for the funding pressures:


1.The biggest risk of OA is not the time after shipment but before it. Because if the buyer cancel the order before shipment, then the seller is not protected by "Sinosure". Therefore, to receive a certain percentage of deposit is very important. In some appliance industry, not accepting the deposit of OA has been slowly fading out of the market, which is a good sign.


2.In the case of coordination and communication, try not to apply for credit insurance payment, because this will affect the seller subsequent premiums for all orders.


3.There are strictly limited for CONSIGNEE and payers of the Sinosure for the OA SHIPPER. If there appears the situation that the CONSIGNEE and insurers is inconsistent, we must inform in advance the Sinosure, otherwise it may arise the situation that the insurance is not accepted. This situation is very common. For example, the insurance subject is in Mexico, but for some requirements such as tax evasion, CONSIGNEE and payment company are in the United States, or either to prove that America is a subsidiary of Mexico, or state on the contract that the price is paid by the United States company. Otherwise, the Mexican company will assume all payment obligations, or else it is likely to be trouble.


In addition to 100% deposit payment term, almost all payment terms have different kinds of risks. But it does not mean not to do business, because some customers do can not make cooperation without the special payment terms. Therefore, for suppliers boss, the main consideration is the financial pressure, the level of demand and the orders’ profits, as well as whether you can withstand the potential risks.


No matter how high the profits, without receiving the money, it can only be the beautiful numbers. Due to the business essence, we have no way to make the risk disappear, but we can try to understand the risks, and then to control  them. Prudent management is more important than anything else. This is the advice of a conscientious buyers to all sellers.


Tags: Trade, L/C, T/T, B/L, Payment

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