Payment Terms
As an importer how do you structure payment terms?
How you will be paid, when you will be paid and for what you will be paid are referred to as your ‘payment terms’.
Payment term refers to the way payment will be made as well as the period over which the importer is allowed to pay for the goods.
If you offer a period after which the importer can pay, you are extending credit to the importer and instead of using the phrase ‘payment term’, you should refer to a ‘credit term.’
Payment terms ranging from 30 to 90 days are quite common in export markets. Be careful when extending longer payment terms, as longer credit periods may increase the risk of default.
The most common payment methods in exporting are:
- Payment in Advance
This is certainly the most preferred form of payment from the exporter’s point of view. However, it is the hardest to negotiate.
- Letter of Credit
Other than Payment in Advance, this is the safest method of payment in exporting. The customer arranges a letter of credit with their bank – known as the issuing bank. The letter of credit contains the instructions that must be followed and documentary evidence that must be supplied to a correspondent bank in South Africa.
- Bill of exchange
Documentary collections are probably the safest method. This is when an overseas bank, acting on your bank’s behalf, only releases the documents necessary for your customer (i.e. the importer) to take possession of the goods once they formally accept the terms of a bill of exchange. In accepting the bill of exchange, the customer essentially pays the overseas bank.
- Open Account
This is an agreement you should only enter into with a very good client – one that you trust. This is because you agree with the buyer that they only need to pay 30 days after receiving your invoice. With an open account, the exporter carries all the risk.
Other issues to consider
As an importer or exporter, it is important to consider how you will get your export earnings paid, the various challenges of import/export, starting an import or export business, and import payment terms and exchange control.