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Terms and Conditions

Payment Terms

Payment Terms Of Foreing Trade. International Terms Of Payment.

Cash Against Documents (CAD)

A payment arrangement in which an exporter instructs a bank to hand over shipping and title documents (see document of title) to the importer when the importer fully pays the accompanying bill of exchange or draft. Also called documents against payment.

Disadvantage:

1. Shipment in trust by seller and no guaranty for payment from buyer side.
2. Documents in trust in buyer’s bank. 
3. Buyer will pay when buyer need documents for customs clearance (based on previous experience) 

PB - Performance Bond
This is a type of bank guarantee which is issued from the Seller to the Buyer. It guarantees that the Seller will meet the terms of the contract. Normally issued in the amount of 2 % of the total amount of the contract, a performance bond can be drawn upon by the Buyer in the event that the Seller breaks the contract and fails to provide the product which was stipulated in the contract.

POP - Proof of Product
A Proof of Product (POP) is often requested by customers or agents who believe it will give them some guarantee of the existence of the product and ability of the supplier to deliver the product. In practice many POPs are false. POP offers no proof at all, because once a POP has been drafted it is automatically out of date - the product could have been sold to another buyer and therefore no longer exists. Nevertheless, a POP is still occasionally requested as apparent proof that a seller has the product, A POP is realistically provided only when the Buyer's bank issues a Bank Confirmation Letter (BCL) to the Seller and or seller's bank via SWIFT. Then the Seller's bank can check the availability of funds in the Buyer's bank and issue a POP to the Buyer's bank within an agreed time period (e.g. 5 days). A seller will not issue a POP to buyer without a non- operative letter of credit opened.

RWA - Ready, Willing and Able
This is a document which is issued by the Buyer's bank. The bank confirms that their client has the sufficient funds in their possession and is ready, willing and able to engage in the contract.

SOFT PROBE. This is an authorization from the buyer to the seller to contact the buyer's bank to verify the buyer has the financial capability to purchase the amount of goods and the method of payment agreed in the (LOI) Letter of Intent.

SWIFT
Society for Worldwide Interbank Financial Telecommunication - a global service which is responsible for facilitating communication between banks. Most payments are made via SWIFT.

Table 1. Terms Ranked from LEAST RISK to MOST RISK for the Seller

Method

Usual Time of Payment

Goods Available To Buyer

Risk
to Seller

Risk to Buyer

Comments

CASH IN ADVANCE

Before shipment

After payment

None

Complete - relies on seller to ship exactly the goods expected, as quoted and ordered

Seller's goods must be special in one way or another, or special circumstances prevail over normal trade practices (example, goods manufactured to buyer-only specification).

LETTER OF CREDIT

(See next two items.)

After shipment is made, documents presented to the Bank.

After payment

Commercial Invoice must match the Letter of Credit exactly. Dates must be carefully headed - Stale documents are unacceptable for collection.

 

Letters of Credit require total accuracy in conforming to terms, conditions, and documentation. Consult your United Shipping Associate member for determining feasibility of terms and conditions.

Confirmed
Irrevocable Credit

After shipment is made, documents presented to the Bank.

After payment

Gives the seller a double assurance of payments - Depends on the terms of the letter of credit.

Assures shipment is made but relies on exporter to ship goods as described in documents. Terms may be negotiated prior to letter of credit agreement, alleviating buyer's degree of risk.

The inclusion of a second assurance of payment (usually a U.S. Bank) prevents surprises, adds assurance that issuing bank has been deemed acceptable by confirming bank. Adds cost and an additional requirement to seller.

Unconfirmed
Irrevocable Credit

After shipment is made, documents presented to the Bank.

After payment

Seller has single bank assurance of payment and seller remains dependent on foreign bank. Seller should contact his banker to determine whether or not the issuing bank has sufficient assets to cover the amount.

Same as above

Credit can be changed only by mutual agreement, as stipulated in a sales agreement. Becomes open account with buyer's bank as collection agent. Foreign bank may have problems making payment in sum or timeliness.

DRAFTS
(See next two items.)

Remittance time from buyer's bank to seller's bank may still take one week to one month.

 

Drafts, by design, should contain terms and conditions mutually agreed upon.

 

A draft may be written with virtually any term or condition agreeable to both parties. When determining draft tenor (terms and conditions) consult with your banker and freight forwarder to determine the most desirable means of doing business in a given country.

Sight Draft (with documents against acceptance)

On presentation of draft to buyer.

After payment to buyer's bank.

If draft not honored, goods must be returned or resold. Storage, handling, return freight expenses may be incurred.

Assures shipment but not content, unless inspection or check-in is allowed before payment.

A draft can be a collection instrument used to exchange possession and title to goods for payment. Seller is essentially drawing a check against the bank account of the buyer. Buyer's bank must have pre-approval, or seek approval of the buyer prior to honoring the check. Payable upon presentation of documents.

Time Drafts (with documents against acceptance)

On maturity of the draft

Before payment, after acceptance

Relies on buyer to honor draft upon presentation.

Assures shipment but not content, time of maturity allows for adjustments, if agreed to by seller.

Payable based upon the acceptance of an obligation to pay the seller at a specified time. Although a time draft has more collection leverage than an invoice, it remains only a promissory note, with conditions.

OPEN ACCOUNT

As agreed, usually by invoice

Before payment

Relies completely on buyer to pay account as agreed

None

All terms of payment, including extra charges and terms should be mutually understood and agreed upon prior to open account initiation. Companies conducting on-going business are candidates for open account terms of payment. Seller must measure not only buyer's credit reliability but the country's as well.

 
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