CHAPTER 4

TERMS OF PAYMENT
TERMS OF PAYMENT

Time of Payment

Place of Payment

Method of Payment
Why do we need to understand the structure of terms of payment?

ü To establish the payment obligations of the buyer

ü To control payment terms in contract -> more profitable business

ü To minimize the risks

ü To optimize the outcome and profitability of the transaction

ü To be used as an additional sales argument to strengthen the competitive edge

ü To use the capital resources in the most efficient way

Key factors in determining the terms of payment

ü Relationship between buyer and seller: the nature and length of the
business relationship (trust & confidence)
ü The nature of the merchandise and industry norms
ü The distance between buyer and seller
ü The potential for currency fluctuation
ü Political and economic stability in either or both countries
Terms of payment and Cash management

• Effective cash management means minimizing the use of capital, while at the
same time using the recourses available to support the core business of the
company.
• Good cash management involve the seller offering the buyer medium-term
supplier credit to be more competitive, providing the risk is minimized and that
such credit is needed to get the deal.
• Effective cash management includes the seller taking the decision to delay,
restructure or cancel a transaction if the risk structure is outside an acceptable
level.
=> Terms of payment helps to determine what capital resources are needed during
the different phases of transaction – the basis for all cash management and to
evaluate risks in international trade more effectively
Terms of payment in the quotation

- To establish the payment obligations of the buyer – when and how they occur in
relation to the seller’s delivery obligations.
- Seller needs to decide which terms of payment that should include in the offer or
propose in the negotiations.
- The final structure and design will be dependent on the seller’s evaluation of the
importance of the deal and its potential profitability in relation to the risks involved
Ø When payment should take place (time of payment)
Ø Where payment should take place (place of payment)
Ø How payment should take place (method of payment)
PLACE OF PAYMENT

- Place of payment will determine the fulfillment of the obligations of the buyer
- Relating to what form of payment is used: Bank transfer/ Open account/ Collection/
Documentary credit

PAYER PAYEE
TIME OF PAYMENT

- The seller and buyer have different view on when payment should take place:
Ø The buyer wants to make the best use of a competitive situation by having seller
also finance the purchase through a shorter/longer term supplier credit on
attractive terms.
Ø The seller prefer payment on delivery or with a shorter differed payment
covering the shipping period only.
- The negotiations will determine when the payment will take place.
- The gap between the different views of time payment of seller and buyer depends
on the size of transaction, the delivered goods and the length of credit discussed.
TIME OF PAYMENT

Advance Payment : The importer pays a portion or the full value of the contract
before the goods are delivered. Main purpose: Ensures the financial capability of
the exporter and binds the responsibility of the importer.

At sight Payment: The importer pays immediately upon the fulfillment of the
delivery obligation or upon receipt of documents. Common in transactions with a
high level of trust between both parties.

Deferred Payment : The importer pays after a certain period following the receipt
of goods or documents. Helps the importer have time to inspect the goods or
manage cash flow.
 At sight payment
• AT SIGHT Payment Conditions require the importer to pay immediately after the exporter fulfills
the delivery obligations or meets other conditions specified in the contract. AT SIGHT payment
conditions are typically divided into 5 types:
1. Payment immediately after completing delivery obligations at the designated place without the
need to load the goods onto the transportation vehicle.
2. Payment immediately after completing delivery obligations and the goods have been loaded onto
the transportation vehicle.
3. Payment immediately after the importer sees the exporter's documents.
4. Payment within 5-7 days after receiving the documents.
5. Payment immediately after receiving the goods at the designated place or the port of arrival.
Type 1 - Payment immediately after completing delivery obligations at
the designated place (without the need to load the goods onto the
transportation vehicle)

• The buyer pays the exporter immediately after the exporter completes the delivery
obligations at the designated place without the need to load the goods onto the
transportation vehicle.
• EXW (Ex Works): Delivery at the exporter’s factory or production site.
• FAS (Free Alongside Ship): Delivery alongside the ship at the loading port.
• FCA (Free Carrier): Delivery to the carrier at the designated delivery place.
• Notification process: The seller notifies the buyer via Telex, Fax, postal mail, or directly
informs the buyer's representative.
Type 2 - Payment immediately after completing delivery obligations
and the goods have been loaded onto the transportation vehicle.

• The buyer pays immediately after the goods have been loaded by the exporter onto the
transportation vehicle at the specified delivery location.
• FOB (Incoterms) (Free on Board): Delivery on the ship's deck at the loading port.
• FOD (Free on Deck): Delivery inside the ship safely at the loading port.
• Rail delivery: At the border station of the exporter's country.
• Process: After receiving the bill of lading from the captain or the owner of the
transportation vehicle, the exporter notifies the importer for payment.
Type 3 – Payment immediately after receiving documents

• The buyer pays immediately after receiving and checking the set of shipping documents
from the exporter. The set of documents usually includes:
1. Commercial invoice.
2. Bill of Lading or transport document.
3. Insurance Policy.
4. Certificate of Quality/Quantity.
5. Test/Inspection Certificate.
6. Certificate of Origin.
7. Packing List.
8. Confirmation of cable advice for shipment.
9. Other documents.
Type 4 - Payment within 5-7 days after receiving the documents

• The importer makes payment within 5-7 days after receiving the documents,
typically applied for complex goods such as electronic components, chemicals,
pharmaceuticals, etc.

• Process: The bank hands over the documents (excluding the bill of lading) to the
importer for inspection. The buyer then makes the payment, and the bank
endorses the bill of lading (B/L).
Type 5 - Payment immediately after receiving the goods at the
designated place or the port of arrival.

• The buyer makes payment immediately after receiving the goods at the designated place
or the port of arrival.
• Receiving concepts:
• Receiving goods at a location in the seller's country.
• Receiving goods at a location in the buyer's country after inspection.
• Receiving goods on the transportation vehicle arranged by the buyer.
PAYMENT METHODS

• The payer and beneficiary are allowed to negotiate the terms and conditions of payment,

creating different payment methods.

• Theoretically, there are many payment methods, but for ease of management and

research, similar methods are grouped into large categories.

• The classification of payment methods can vary depending on the criteria used for

categorization.
Classification by Legal Nature

Group with International Customs

• Collection: Governed by the "Uniform Rules for Collections (URC)" issued by the ICC.
• Documentary Credit: Governed by the "Uniform Customs and Practice for Documentary
Credits (UCP)" issued by the ICC.

The collection and documentary credit methods are commonly used even when the
trading parties are not well acquainted with each other
Classification by Legal Nature

Group without International Customs:

Remittance, Open Account, Advanced Payment, Cash on Delivery (COD), Letter of
Authority to Purchase (A/P).
• The ICC does not have specific legal documents regulating these methods. Banks act only
as intermediaries and do not bear responsibility for the payment content.
• These methods are typically used only when the parties trust each other to avoid risks.
Classification by Payment Documents

Clean Payment:
• Payment without accompanying commercial documents: Clean Collection, Remittance,
Open Account, Cash on Delivery (COD).
• This method does not require accompanying documents when executing the payment
order.

Documentary Payment:
• Executed based on the submission of documents: Documentary Collection,
Documentary Credit, Letter of Authority to Purchase.
• The basis for payment and receipt is the submission of the required documents.
 Classification by Risk Levels

• The risk level depends on the time gap between key

events: when the buyer pays compared to when they
receive the goods, or when the seller ships the goods
compared to when they receive payment.

• The more advantageous a payment method is for the

importer, the higher the risk it poses to the exporter,
and vice versa.

• The chart illustrates the risk levels across different

payment methods.
Summary of the structure of the terms of payment
Terms of payment Comments
A: Payment before delivery
1. Without advance payment guarantee. 1. Gives the highest security for the seller.
2. Against contractual advance payment guarantee. 2. As above, based on due fulfillment of the contract.

3. Against an ‘on demand’ advance payment guarantee. 3. Gives less security for the seller.

B: Payment at delivery
1. Letter of credit, documents against payment. 1. High security – dependent on the strength of the issuing
bank – and if confirmed or not.
2. Documentary collection, documents against payment. 2. Dependent on the buyer honouring the documents – and
which documents are included.
C: Payment after delivery
1. Letter of credit, documents against acceptance. 1. Same security as B but with later payment.

2. Payment secured by payment guarantee. 2. The security is dependent on the issuing bank and the
wording of the guarantee.
3. Documentary collection, documents against acceptance. 3. As B, but after the release of documents the risk is on the
buyer until payment.
4. Bank transfer. 4. Risk on the buyer until payment.
TERMS OF PAYMENT

Structure of terms of payment based on bank transfer in open-account

“Payment through bank transfer, which shall have reached (name and address of
the seller’s chosen bank – with full details of the SWIFTBIC code and customer
account numbers), not later than 90 days from date of invoice, which shall be the
same as the date of shipment. Interest on arrears at x% p.a. is charged from
maturity date until payment is received.”
TERMS OF PAYMENT

Structure of terms of payment combined with a bank guarantee

“The buyer has to arrange a payment guarantee issued by ... ( the name of the
buyer’s bank) for USD 15,500 in favour of the seller, covering the buyer’s payment
obligations according to contract. The guarantee shall be advised through ... (the
name of the seller’s bank) and shall have reached that bank not later than 30 days
from date of contract and be valid for 30 days from last delivery as stipulated in the
contract.”
TERMS OF PAYMENT

Structure of terms of payments based on documentary collection

“Payment through documentary collection at first presentation of documents

through (complete name and address of the chosen bank at the domicile of the
buyer, where the documents should be presented).
All collection charges (alternatively, bank charges outside the seller’s country) are
to be paid by the buyer. Interest on arrears at x % p.a. will be charged on overdue
payments and is to be paid together with the documents.”
TERMS OF PAYMENT

Structure of terms of payments based on documentary collection

- Payment should be effected against presentation of the following documents:

+ at sight bill of exchange drawn on ... (the buyer)
+ invoice in triplicate;
+ certificate of origin issued by ...
+ insurance policy, covering ... (value and risks);
+ full set of clean-on-broad bill of lading, blank endorsed.
TERMS OF PAYMENT

Structure of terms of payment based on a letter of credit

“Payment through letter of credit, payable at sight with and confirmed by ... (the
agreed advising bank). The letter of credit shall be issued by ... (the agreed issuing
bank) and shall have reached the advising bank in form and substance acceptable
to the seller in accordance with the contract, not later than 60 days from the date
of the contract.”
TERMS OF PAYMENT

Structure of terms of payment based on a letter of credit

- The letter of credit, which must give reference to the contract number and date,
shall be valid for three months and be payable against the following documents:
+ at sight bill of exchange, drawn on the advising bank;
+ invoice in triplicate;
+ packing list;
+ certificate of origin, issued by ... :
+ full set of clean-on-board marine bill of lading, blank endorsed and showing ...
(shipping date, ports, etc.)
PAYMENT CURRENCY

Payment currency vs Account currency?

Quantity: 500 MT ( 5% at seller’s option)

Price: 100 USD/MT FOB Cat Lai Port, Vietnam
Grand total: 50,000 USD ( 5% at seller’s option)
Payment in CNY at exchange rate of contract date / of payment
date / of 6.14 CNY per USD
PAYMENT CURRENCY
Factors affecting the use of payment currency in contract
ü The correlation between the buyer and seller.
ü Practices and international customs on the use of payment currency.
ü The position of the currency in the international market.

The advantages of using the payment currency

ü Raise the position of currency in the international market.

ü Not using foreign currency to pay foreign debts.
ü Avoid the risk of exchange rate fluctuations.
ü Increasing exporting goods