Note: Each country has its own specific rules on trade, including regulations and practices that influence terms of payment (e.g. inspection and release of goods prior to payment). Because of these variations across international markets, the following discussion focuses on the norms of payment used by Canadian buyers and can be regarded as representative of those used in sophisticated, more affluent markets in general.
Terms of Payment
Import terms vary with individual importers. In general, quotations should be made f.o.b. foreign port (in USD currency if not otherwise indicated), including packaging, but may be requested c.i.f. to a named port. Payment for imports from traditional suppliers is generally cash against documents (CAD – the buyer assumes the title for the goods being purchased upon paying the sale price in cash). Contracts often include a clause stating that the goods must be inspected and signed off in-country by the buyer or agent prior to shipping. The importer usually requests a guarantee to be included in the contract against hidden quality defects, and could request credits as a result of poor product quality, damage before or during shipping, or late delivery.
In Canada, the full invoiced amount is not paid until inspection of the goods has taken place either in the country of origin or at the destination, by the buyers themselves, their agents or an independent authority. When the business relationship is well established, an open account method (see more in “Methods of Payment” below) may be used to save bank charges for both parties. The services of an export agent may be useful in handling such intricacies for the first few operations.
Importers and agents frequently insist on an exclusive arrangement with the exporter, particularly if they pay promotional costs. They are, however, likely to subject potential new suppliers to careful scrutiny before doing business. They expect to obtain references and will want to know about your export experience, financial standing, and other such details. Suppliers who do not supply references will likely not be well-received.
Likewise, once you have shown a potential buyer or agent what you are capable of producing, and they express an interest in taking the relationship further, it is considered normal and prudent for you to request information from them as well. Request trade references (and talk to these other suppliers), review their company and financial profiles to determine their level of experience and their payment and credit history (see more below regarding Credit reports).
Ideally, from this information you will want to see that the buyer’s company is profitable and growing, that they pay on time (payment history), that they have full capacity to make payments (company liquidity, etc.), and that the company has available assets (collateral) in the event of bankruptcy.
Forms of Payment
Cash in Advance
This is the safest form of payment but less common because most buyers prefer to secure credit terms with their suppliers. However, there are circumstances where you may be able to secure at least part of your payment in advance. Examples would be smaller orders as well as specialized orders such as equipment or other goods that are unique and/or custom-made to the specifications of the buyer.
Open Account
Relatively common, this exporter-financed payment method is used mainly where the buyer is well known (good track record, history and credit) because the exporter is fully exposed to risk of non-payment. Terms normally allow 30, 60, 90 days for payment and can be subject to extension.
letters of Credit
Perhaps the most common method of financing routine foreign transactions, the letter of credit is a bank-issued document that outlines its commitment to pay a certain party (the exporter, in our case) a specific amount of money on behalf of another party (buyer/importer) provided that the seller meets very specific terms and conditions.
Due to the high level of bank involvement – checking all documents and guaranteeing the payment – letters of credit provide a good degree of security for both exporter and importer. There is, of course, a cost involved regarding the bank charges establishing a letter of credit.
Note: Letters of Credit are “risk-free” only as far as the bank that issues them guarantees (assurance) – review the Bank’s assurances and be sure that you meet all documentary and other requirements.
There are a variety of different types of letters of credit, each with varying terms and conditions. Some of the most common forms are (some of the following definitions derived from: www.itds.treas.gov):
Irrevocable (unconfirmed)
The most popular form of Letter of Credit, it cannot be amended or cancelled without prior agreement of all parties to the credit. Payment is made on sight (presentation of documents to the issuing bank) or at pre-agreed time.
Revocable (confirmed)
A letter of credit that can be cancelled or altered by the drawee(buyer) after it has been issued by the drawee’s bank. These are rarely used because of security concerns.
Other Short Term Financing Instruments
Collections: bills of exchange (drafts)
Importer pays on sight (upon presentation of documents), or term (payment due within a certain time – usually 30, 60, 90, or 180 days);
Discounting receivable (selling them to a bank);
Factoring: selling receivables to a factor (a company engaged in the business of financing accounts receivable), who assumes the payment risk.
Here is a checklist to run through once you have come to agree on letter of credit payment terms:
Names complete and correct?
LC is irrevocable?
Confirmed by a reputable bank?
Amount and currency stated is acceptable?
Acceptable shipping and expiry dates?
Time period sufficient for presentation of documents?
Realistic shipping terms?
Goods and/or services accurately described?
Acceptable insurance terms?
Other Potential Resources to help you assess export risks:
Note: No guarantee that any of the following will in fact be able to help you in this regard.
Banks
Other exporters (remember to seek references from your prospective buyer)
Dun and Bradstreet directories (http://www.dnb.ca/products/businforep.html)
Export Development Canada (www.edc.ca):
“Export Check” Reports on Non-Canadian buyers
Credit reporting agencies (e.g. in Canada, Equifax International)
Embassies and Trade Offices (you trade representatives abroad as well as the buyer’s country representatives in your region):
Your trade service abroad (for example, in Canada, the Trade Section of your Embassy in Ottawa or Consulates in Toronto, Montreal, and Vancouver etc.), exists in large part to assist exporters such as yourself. They may be able to help you investigate the company further or otherwise help you in your efforts. You may be able to locate these offices via: www.embassyworld.com or otherwise through your corresponding Foreign Ministry Headquarters.
Conversely, a foreign country’s trade mission in your country provides support mainly with regard to their own export endeavours (that is, exports from their country to yours). However, you might still wish to solicit from them any advice regarding their domestic importing/trade companies and services or other aspects of exporting to their country.
Dispute Resolution
Most dispute resolutions arise from problems in delivery or condition of goods or payment for goods. Often, pre-emptive measures can be taken to avoid costly (for both parties) court proceedings. If long-term trade relationship is anticipated, provisions for dispute resolution can be included in contracts. Also, Letters of Credit can detail in full all terms of the agreement (even if not required by the issuing bank) so that there is little room remaining for disagreement. Such measures are of course not infallible, but may lessen the chance of disputes becoming overly problematic for either party.
When disputes do arise, try to resolve them directly with your trade partner. If you cannot solve the dispute directly with your partner, there are other alternatives before reverting to the courts. These include arbitration and mediation which will briefly discuss now.
Mediation is when a third party intervenes to facilitate communication between the two parties in order to resolve the dispute. Mediation is simple and cost-effective, but resolutions derived from it are only binding if the parties agree to make them so (contract revision or other documentation of agreement). Arbitration usually takes place when a higher degree of privacy and discretion is warranted or even demanded by either party. Arbitration may be guided by local (in Ontario, Canada for example there is the ADR Institute of Ontario) ) or international rules (the UN Commission on International Trade Law – UNCITRAL – for example) or terms of reference agreed upon by the parties involved. The International Chamber of Commerce may also be a good source for mediation and arbitration guidelines and support. In any case, the goal is to solve the dispute without having to go through any legal action.
Find out more about international trade dispute resolution from the International Trade Centre (www.intracen.org) and the United Nations Commission on International Trade Law (www.uncitral.org).
Additional information regarding dispute resolution for the Canadian market can be found at:
Government:
Dept. of Justice Canada – Dispute Resolution Centre – can be found at http://canada.justice.gc.ca/en/ps/drs/
Commercial:
Accord Canada Dispute resolution group – can be found at www.accordcanada.com/home.htm
Note: Find other private companies specializing in dispute resolution via: www.strategis.gc.ca à “Company Directories” à “Company Capabilities” à “Search” à “Keyword: International dispute resolution”)