Many ecommerce businesses receive international orders for both single items as well as large quantities. These businesses usually take credit card payments for the orders, which puts them at great risk of incurring chargebacks, especially for large ticket items and large transactions. They do not want to turn away an order, but they are frustrated with the level of chargebacks they receive. Implementing the appropriate payment methods and properly financing your export sales are two key factors to your success in exporting. The most widely used methods of payment instruments in business-to-business international transactions are bank wire transfers and commercial letters of credit (L/C’s). Typical financing can either be obtained through the normal lending channels or through the U.S. government when you have exhausted the conventional options.
Methods of Payment
A bank wire transfer is a secure and common method of payment. All you have to do is forward your banking information to the buyer, who will make the payment. You should create a document on your company letterhead and call it “Bank Wire Transfer Instructions.” This document should include instructions on how to make the payment, including the following banking information:
- Bank name
- Account holder name
- Account number
- Routing number (ask your bank)
- Swift code (ask your bank)
- Branch name
- Telephone number (make sure to include a number that can be dialed from outside the U.S.)
You should refrain from giving out your banking information to just anyone. Make sure the company you’re dealing with is legitimate. You may want to assign one bank account specifically to receive funds for your orders.
A commercial letter of credit (L/C) is another secure and common method of payment, governed by the Uniform Customs and Practices for Documentary Credits (UCP) under the International Chamber of Commerce (ICC) in Paris. Basically, the foreign buyer instructs its bank to open an L/C in favor of the seller with certain conditions that both parties need to agree to in advance. Once the seller meets the conditions of the L/C and presents the proper documents that support the L/C terms and conditions to the buyer’s bank, the funds are released and transferred to seller’s bank account.
L/C’s can be tricky, confusing and costly to the seller. Most large banks have a department that specializes in letters of credit and can certainly assist you with your transaction requirements. Also, the freight forwarder that you use to ship your merchandise should be able to help you as well and can present the required documents on your behalf to get paid.
The following is an example L/C procedure:
- Typically, the first step would be for the U.S. seller and the foreign buyer to negotiate the terms and conditions of the L/C. Once agreed upon, the U.S. seller starts by presenting an invoice reflecting the terms and conditions, referred to as a pro-forma invoice, to the foreign buyer so an L/C can be issued.
- Upon receiving the pro-forma invoice, the foreign buyer (applicant) would then secure the proper financing with its bank (the issuing bank) in the form of collateral or cash and apply to open an L/C in favor of the U.S. seller (beneficiary), through its correspondent bank in the U.S., referred to as the advising or confirming bank. As the U.S. seller you should request that your bank becomes the advising and possibly the confirming bank as well. The advising bank is solely responsible for submitting the proper documents to the issuing bank for payment. However, should the issuing bank not pay, the advising bank is not responsible for paying either. Therefore, to ensure that you are properly paid you should request that the advising bank confirm the L/C thus taking on both roles and guaranteeing payment should the issuing bank ultimately not pay, provided that all the proper documents have been submitted by the beneficiary.
- The advising/confirming bank will confirm the legitimacy of the L/C before forwarding it to the beneficiary for acceptance. Before confirming acceptance of the L/C, the beneficiary should make sure that it complies with the pro-forma invoice terms and conditions. Should the beneficiary find incorrect or misspelled information, the beneficiary should immediately contact the applicant and ask that an amendment be made to the L/C to correct the discrepancies.
- Upon confirming acceptance of the L/C, the beneficiary can then proceed with processing the order by manufacturing or purchasing the goods, shipping the goods and submitting the proper documents to the advising/confirming bank for payment. Up to this point the beneficiary will have had to use its own finances to manufacture or order the goods from its supplier(s). Keep in mind that prior to accepting an L/C the beneficiary (U.S. exporter) will need to secure the required financing to manufacture or purchase the goods from its supplier(s) by using its own capital or obtaining a loan to cover the cost of the transaction.
- The advising/confirming bank will check the documents for discrepancies and submit them to the issuing bank for payment.
- Upon receiving the documents, the issuing bank will check for discrepancies and make payment to the beneficiary’s bank account if none are found. However, should the bank find discrepancies, then payment cannot be made until they are resolved in writing in the form of amendments.
Keep in mind that you will be charged for each amendment. Therefore, pay close attention to the details of the L/C terms and conditions. When entering addresses, product description, quantity and pricing in your export documents, make sure that they conform to the L/C requirements.
Important L/C Components
Documents – one of the most important components of an L/C are the required documents to be submitted by the seller for payment including bill of lading, commercial invoice (in multiple originals), packing list (in multiple originals), certificate of insurance and certificate of inspection. If you have to rely on a third party for a document (i.e. federal or state agency) make sure it is obtainable and that you can receive it on time before accepting an L/C.
Dates – another important component are the dates including the expiration date of the L/C, shipment dates and date by which documents need to be presented for payment.
L/C Cost – you should get a list of all the possible charges that an L/C can incur prior to accepting an L/C. Consult with your bank and freight forwarder first.
Letter of Credit Terms and Conditions
- Revocable (may be canceled by the buyer) versus irrevocable (cannot be canceled by the buyer).
- Confirmed (a second bank guarantees payment in addition to the buyer’s bank) versus unconfirmed (payment is only guaranteed by the buyer’s bank).
- Transferable Credit allowed versus not allowed. This is typically used when the U.S. exporter is not the ultimate supplier of the goods, therefore allowing the terms and conditions of the L/C, along with partial payment to be transferred to the ultimate supplier.
- Back-to-back credit is used when the L/C is non-transferable and the U.S. exporter needs to make payment to the ultimate supplier of the goods. The original L/C is used as collateral against the second L/C.
- Sight credit (payment is made as soon as the required documents have been presented) versus usance credit (payment is made in 30, 60, 90, 120, etc.. days).
- Partial shipment allowed or not. “Allowed” means the order can be shipped in multiple consignments. “Not allowed” means the entire order must be shipped in its entirety.
- Trans-shipment allowed or not. “Allowed” means the goods, while in transit, can be unloaded off one vessel and loaded onto another vessel. “Not allowed” means the goods must remain in the same vessel until they reach port of destination
- Insurance required or not. If you do decide to insure your cargo, the value is commonly based on 110 percent of CIF. CIF stands for cost, insurance and freight (named port of destination).
- Inspection certificate required or not. In certain cases, the buyer will require that an internationally recognized third party inspection company, such as SGS, inspect and certify that the goods conform to the terms and conditions of the L/C. You should never accept an L/C condition that requires the inspection to take place at the port of arrival. Inspection should always take place before you ship the goods.
- L/C terms could also include an irrevocable letter of credit, confirmed by a US bank, payable at sight, with transshipment and partial shipment allowed.
Financing Your Export Sale
Export transactions can be financed through the private sector (lending institutions) or through the U.S. government. If for some reason you are unable to obtain financing through the normal lending channels you can turn to the U.S. government for assistance.
The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States. Ex-Im Bank’s mission is to assist in financing the export of U.S. goods and services to international markets.
Ex-Im Bank enables U.S. companies, large and small, to turn export opportunities into real sales that help maintain and create U.S. jobs and contribute to a stronger national economy. Ex-Im Bank does not compete with private sector lenders but provides export financing products that fill gaps in trade financing. They assume credit and country risks that the private sector is unable or unwilling to accept. They also help to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters.
Ex-Im Bank provides working capital guarantees (pre-export financing), export credit insurance, loan guarantees and direct loans (buyer financing). According to Ex-Im Bank, 85 percent of their transactions directly benefit U.S. small businesses.
Getting paid for your export sale can be tricky and complicated, especially if you plan on accepting letters of credit as a method of payment. If you are new to exporting, you should first consult with your bank and freight forwarder before implementing your payment policy. If you plan on working with letters of credit, it is vital that your finances are in place before you can accept foreign orders. In addition to using the conventional sources for financing, you can always turn to payboutique.com for your export financing needs.
by Hal Selim