Having confirmed the price & terms of trade to your overseas customer & costs of shipment including insurance, you need to decide which of the below methods of payment you require from your overseas customer:
Telegraphic Transfer or Telex Transfer, often abbreviated to TT, is an electronic means of transferring funds overseas. Funds are transferred into your bank account and you can then ship your goods. Whilst telegraphic transfer is the most common payment method used and the most secure method for the exporter, it is the least secure method of payment for the importer as they have no guarantee you will in fact send the goods.
Credit Card Payment
Credit card payments can be accepted if the exporter has a merchant agreement with an international credit card company. Many purchases relating to internet shopping, mail orders or other forms of distance selling depend on customers providing a valid credit card number. They must also sign or otherwise confirm their wish to purchase. In most cases, this will be with a company operating out of New Zealand and the transaction will be settled in New Zealand dollars. Purchasing at a distance by providing credit card details by fax/phone/email involves risk for both parties. The technology is improving, but online credit card security remains an issue, despite fast growth in electronic trading. Your bank will be able to advise you on accepting credit card payments.
Letters of Credit
Letters of credit are a method of payment frequently used in international trade and has advantages and disadvantages. A letter of credit is a promise made by an importer to an exporter to the effect that the exporter will be paid upon the production of certain documents. This promise is normally transmitted through (and backed up by) a bank. Your bank & forwarder will be able to advise you regarding accepting a Letter of Credit for payment.
L/Cs provide the highest level of security, but are more expensive than other methods of payment and can cause delays.
Sight and Term Drafts
A simpler method of undertaking international transactions is a “bank draft against documents”. This simply means the importer must instruct his bank to transfer funds to the exporter before the bank will let him have the documents. This provides some measure of security to the exporter, but not as much as an L/C. The importer has the option of simply refusing to accept the draft, in which case he cannot take possession of the goods, but neither does the exporter receive payment. In cases where the importer’s business collapses, the exporter can be left exposed.
Drafts can also be drawn at sight, i.e. payment is made on the spot, or subject to terms. If a term is specified, the banks will recover interest in accordance with the terms of the draft.
This is the method used by most companies who have transactions with associated companies or where there are no issues of security, for example, long-standing trading relationships developed on the basis of mutual trust. This method, incidentally, is used for most domestic transactions in New Zealand.
Most companies will extend credit terms to their clients, subject to them meeting certain criteria. While this is the most efficient and less costly option, it also has the biggest level of risk. Many traders are prepared to accept those risks domestically but are reluctant to do so internationally, where debt recovery can be more complicated.
Some exporters will simply demand payment in advance before they will ship the goods. This way, the importer assumes all the risks.
The selection of the method of payment is in essence a function of risk assessment. There are substantial penalties for seeking too much security (in the form of delays and charges & loss of the sale) and equally substantial penalties for running an unacceptable level of risk.
Our advice is to look at these matters from a risk assessment perspective and then decide on the best method.
- Telegraphic transfers, credit cards, drafts and open accounts are simpler and less expensive than L/Cs, but less secure.
- The selection of the method of payment is a risk assessment decision.