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Top 5 International Payment Terms for Export

What is the international payment term for exports?

The main way to pay for things you sell to another country is called a "Letter of Credit" (LC). It's a form of assurance  to send money from the buyer's bank to your bank showing that they'll pay you once they get what they ordered. This makes sure you get paid and it helps the buyer by making sure they only pay when everything is delivered as agreed.

However this is not the only way to conduct outward remittance from India for business purposes. 

Read on…

#1 Wire transfer

Wire transfers, also referred to as bank transfers or credit transfers, facilitate electronic fund transfers from one bank account to another. Unlike traditional modes like checks, wire transfers offer a direct and expedited route for money transfer, making them particularly suited for urgent transactions and international payments.

A primary advantage of wire transfers lies in their speed. While alternative payment methods may entail lengthy processing times, wire transfers typically finalize within hours, ensuring timely access to funds. This quick processing is invaluable for businesses with pressing financial needs or stringent deadlines.

Moreover, wire transfers provide a robust level of security. Conducted as direct bank-to-bank transactions, they minimize the risk of fraudulent activity or interception. Each transfer undergoes encryption and authentication, instilling confidence in both senders and recipients.

Wire transfers prove especially beneficial for large-scale transactions and international payments. Whether facilitating payments to overseas suppliers, funding expansion endeavors, or executing cross-border investments, wire transfers offer a seamless and reliable solution. They support transactions in diverse currencies and ensure the prompt receipt of payments, regardless of geographical barriers.

Additionally, wire transfers aid businesses in meeting regulatory compliance standards. Given the stringent anti-money laundering (AML) and Know Your Customer (KYC) regulations, utilizing secure and traceable payment methods is imperative. Wire transfers furnish a transparent transaction trail, enabling businesses to adhere to regulatory requirements and uphold financial transparency.

#2 At sight L/C

At sight L/C," also known as "At sight Letter of Credit," is a financial tool commonly used in global trade. Unlike other types of letters of credit, an At sight L/C ensures immediate payment upon the presentation of specified documents, typically following the shipment of goods. Here are some unique characteristics and considerations regarding At sight L/Cs:

  1. Swift Payment: At sight L/Cs guarantee quick payment to exporters once they fulfill their obligations, reducing the risk of payment delays. This feature is especially beneficial for businesses operating in unpredictable markets.
  2. Risk Reduction for Exporters: By providing instant payment upon document verification, At sight L/Cs mitigate the risk for exporters, assuring them of timely compensation for their goods.
  3. Document Validation: Payment under an At sight L/C depends on the submission of specific documents, such as commercial invoices and bills of lading. Once these documents pass scrutiny by the issuing bank, payment is released promptly.
  4. Importer Flexibility: While ensuring immediate payment to exporters, At sight L/Cs give importers the flexibility to review documents before releasing funds. This ensures that the goods have been shipped and meet the agreed-upon terms.
  5. Cost Considerations: Although At sight L/Cs offer benefits like prompt payment and risk mitigation, they may come with higher costs compared to alternative payment methods. Importers and exporters should carefully assess these costs before opting for this payment mechanism.

#3 Documents against Payments

In International Payment Terms for Export, Documents against Payment (D/P), also known as Cash Against Documents (CAD), is a common way to handle payments in global trade. Here's how it works:

When there's a D/P transaction, the exporter sends the goods to the imporareter and gives shipping documents like invoices to their bank. Consequently, the exporter's bank sends these documents to the importer's bank, asking them to give the documents to the importer only after they pay or agree to pay.

Here are some key points about Documents against Payment:

  1. Payment Conditions: The importer needs to pay their bank before they can get the shipping documents and take the goods. Once they pay, their bank gives them the documents to collect the goods.
  2. Reducing Risk: Documents against Payment help the exporter because they keep control of the shipping documents until they get paid. This means they're less likely to lose out if the importer doesn't pay or takes too long to pay.
  3. Exporter's Side: From the exporter's side, Documents against Payment make sure they get paid before the importer gets the goods. This keeps the exporter safe and ensures they're paid for what they sent.
  4. Importer's View: For the importer, Documents against Payment lets them check the shipping documents before paying. This way, they can make sure everything's okay with the goods before they pay.
  5. Banks' Role: Banks are crucial in Documents against Payment deals because they help move the documents and money between the exporter and importer. The exporter's bank sends the shipping documents to the importer's bank, which holds them until the importer pays.
  6. Used Around the World: Documents against Payment are accepted worldwide in global trade. It's a trusted and organized way for exporters and importers to handle payments.

#4 Clean payment

In the context of outward remittances from India for international business transactions, a "clean payment" denotes a straightforward transfer of funds from an Indian entity to a foreign recipient. This transfer is conducted without the necessity for additional documentation or conditional requirements.

Here's how clean payments are pertinent to outward remittances from India:

  1. Efficiency and Simplicity: Clean payments offer Indian businesses a streamlined and efficient method for transferring funds internationally. Without the need for extensive documentation or meeting specific conditions, this process simplifies outward remittances, facilitating smoother transactions.
  2. Versatility in Transactions: Clean payments provide flexibility to Indian businesses, allowing them to swiftly execute outward remittances for various purposes, such as settling invoices, making investments abroad, or financing imports. This flexibility enables businesses to respond promptly to international financial obligations.
  3. Compliance Obligations: Despite their simplicity, it's imperative for Indian businesses to adhere to regulatory guidelines established by the Reserve Bank of India (RBI) and other governing bodies. This entails ensuring compliance with prescribed limits on outward remittances, furnishing accurate transaction details, and maintaining comprehensive records for audit and reporting purposes.
  4. Risk Management Considerations: While clean payments expedite the outward remittance process, businesses must also address associated risks, including exchange rate fluctuations, transaction fees, and the reliability of recipient banks. 
  5. Common Payment Methods: Wire transfers, electronic funds transfers (EFT), and online banking platforms are typical channels utilized for clean payments in outward remittances from India. These methods offer speed, security, and convenience, ensuring efficient fund transfers across international borders.

#5 Collection of bills

In international business, the "collection of bills" refers to a payment process where a bank serves as an intermediary to facilitate fund transfers between a buyer and a seller. Here's a breakdown of how it works:

  1. Submission of Documents by the Seller: After shipping the goods, the seller submits required documents such as invoices and shipping papers to their bank.
  2. Transmission to Buyer's Bank: The seller's bank forwards these documents to the buyer's bank, along with instructions for payment collection. This may involve direct submission or routing through correspondent banks, especially if the buyer's bank is in another country.
  3. Verification and Authorization: Upon receiving the documents, the buyer's bank verifies their authenticity and compliance with the transaction terms. If satisfactory, the bank authorizes payment to the seller's bank.
  4. Funds Transfer: The buyer's bank transfers the agreed-upon amount to the seller's bank through the international banking system. The duration varies depending on banking procedures and countries involved.
  5. Crediting Seller's Account: Once funds are received, the seller's bank credits their account with the collected amount. The seller can then access the funds as per their banking arrangements.
  6. Completion of Transaction: With successful fund transfer, the collection process concludes, enabling the seller to fulfill any outstanding obligations or proceed with subsequent transactions.

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