Terms of Credit in Export Finance

The terms of credit are contractual matters of prior arrangements between buyer and seller, and their determination depends upon a number of such factors as the type of merchandise to be shipped, the availability of the merchandise, the amount involved, the market customs, the credit standing of the buyer, the country in which the consignee is located, the exchange restrictions existing in that country, the amount due from the buyer at the time the shipment is made, the availability of freight space to the country of destination, whether the account is a new one or an old one, and many other considerations.

The terms of sale should be carefully distinguished from the closely related ‘terms of credits’. The terms of sale are the conditions of content, time, place and delivery of the merchandise, and only indirectly affect the extension of credit or the length of time for which credit is allowed. The terms of credit are the expression of the extent of trust, the seller (exporter) is willing to place in the buyer.

Terms of Credit In Export Trade

1. Consignment. This method is probably used in the export trade, possibly because export transactions are always wholesale trans ­actions. In the end, payment is frequently made by means of a clean draft, that is, a draft without any documents attached, and, therefore, a draft which the buyer may honor or not as he sees it.

2. Open Account. It may be liquidated by means of a clean draft.

3. Sight Draft. This refers to documents against acceptance (D/A). In this case, credit is extended on the basis of the buyer’s “acceptance” of a draft calling for payment within a specified time.

  • This specified time may be expressed as a certain number of days after sight, that is, after the draft is first presented to the consignee.
  • This specified time may be expressed as so many days after the date on which the draft is drawn. Date drafts are preferable because they indicate a definite date for their maturity.
  • Generally, the drawee is permitted to examine the merchan ­dise before he accepts the draft; but in some cases this is not allowed.

4. Letter of Credit. Payment is made against the documents surren ­dered to the named bank. The buyer arranges for the establish ­ment of a Letter of Credit through his local bank and specifies the conditions under which payment may be made to the seller. Upon the arrival of the credit, the US bank notifies the US exporter that the credit is at his disposal, and upon what terms. To secure payment, the exporter in US simply presents the necessary or specified documents covering the shipment to the notifying bank, either directly or through his own bank in US. If the documents are in order, they are accepted by the bank, and the exporter receives the payment in full. As far as the exporter is concerned, the transaction is closed. Great care, however, must be taken by the Indian shipper to comply with all the conditions set forth in the original Letter of Credit. Even experienced exporters occasionally get into difficulties by overlooking some item.

5. COD (Cash on Delivery). This may be worked out in one of the several ways:

  • Cash against documents at the point of shipment (usually at the port of shipment). This involves advance payment. The goods are not released for shipment until the buyer pays for them. Part payment may be made in advance and part payment against documents.
  • Cash against documents at destination: (sight draft) The goods are shipped without prepayment but the buyer must take up the draft and pay the face amount of it upon presentation.
  • Document against payment: (time draft) The goods are shipped without pre-payment, with a draft calling for pay ­ment within thirty, sixty, ninety or one hundred and twenty days from the date or sight. On arrival, the merchandise is placed in a warehouse. Payment may be made at any time within the period specified in the draft, at which time the buyer may take possession of his goods. Partial deliveries, against proportionate payments, can usually be arranged under this method.

6. Cash with Order (CWO). Although once a practically unknown procedure, due to difficulties currently encountered by foreign importers in securing merchandise, this may now be a practice which is used at times. It may be accomplished either by actual remittance of cash by a bank draft, or by a cheque on an account in India, or by an available letter of credit.

It should be emphasized that the terms of sale virtually represent a contract between the buyer and the seller and include the “terms of credit”. “Terms of sale”, when once agreed upon between buyer and seller, should include every condition on which the sale has been made.

Credit: Export Management-CMU

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