The ideal form of payment for any exporter is to receive cash with the order. With this method of payment, money is received before the goods are delivered and no risk is involved.
But it is unlikely that this method can be used, unless the product being sold is in heavy demand. There may be also cases where specialised goods are custom-made. In such circumstances, the exporter will probably ask for cash with the order.
In practice a compromise is often sought. For example, cash payment may be required when the goods are ready for shipment. Another type of compromise is when a percentage of the price is paid with the order, a further percentage at a certain stage of manufacture, and the remainder on delivery of the goods.
The open account procedure is when the exporter dispatches the goods, prepares the invoice, sends them to the customer and then waits for payment. The exporter should get his money as specified in the terms of payment. But there is a very real risk of total loss.
There is no special procedure or documentation. All that has to be agreed upon is the period of credit. Typical credit arrangements are: net monthly account; cash within seven days; 2i4 % discount for payment within 30 days.
Open account is generally restricted to transaction where the exporter and the customer have a close relationship or understanding, and where there are no exchange restrictions to complicate settlement.
Sales on this basis are usually paid for by periodic payments, such as monthly statements by bank, mail or cable facilities. Obviously the exporter must have sufficient financial strength to carry the cost of the goods until he receives payment.
It may well be decided that open account terms are the ones to use when selling in competitive, sophisticated and demanding markets and the customers are very well known.
Shipment on Consignment:
In a shipment on consignment deal, the exporter retains title to the goods and agrees to wait for payment until the goods have been sold in the customer’s country. This method means that the goods are placed in the foreign market, but the risks involved are considerable.
Until the goods are sold, the customer or consignee may return them at may time, without liability. There might be difficulty in ensuring that the consignee observes the terms of the agreement faithfully.
The exporter’s stock may be built up and abroad to a dangerously high degree, outside his control, and subject to political change and climatic risks.
Shipment on consignment should therefore only be made, with a full understanding of the credit and other risks that are involved, and should probably be limited to stable countries where the exporter has proved and trusted agents to keep an eye on the market and where the customers are well known and committed to the exporter.
Documentary Credit and Documentary Collection:
The above methods are all used in exporting and all have their drawbacks. But by far the most common ways of getting paid are by:
i. Documentary credit using a letter of credit (L/C), and
ii. Documentary collection using a bill of exchange (DA/DP).