Financing

Financing

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With international contracts, if you're the seller, you may want payment before you send any goods, but the buyer might not want to pay you until they've received them. Or the buyer might want a credit period. How can this be reconciled?

There are a number of different ways to pay in an international sale. Your bargaining power will determine whether you can get the buyer to agree the method that suits you best. You can negotiate with your buyer over which of the following ways to pay:

Cash with order

This means that the buyer pays for goods when they order them. This might not be possible with large contracts, but it's often possible for smaller ones. It gives you the greatest degree of control over the entire transaction, as the buyer depends on you to send the goods as agreed. You could agree that the buyer pays with a personal cheque, banker's draft, or electronic transfer.

Open account

This means that you have a prior arrangement with the buyer for them to pay invoices that you send at agreed times. You'll normally send the goods to the buyer before they pay you. You must make sure you're happy with the buyer's reputation and that you trust them before sending the goods on an open account basis.

Bill of exchange

A bill of exchange is an unconditional written order that requires the 'drawee' (usually a bank) to pay the payee (you) a certain sum of money. There are 2 types:

  • A sight bill means the sum is payable as soon as you present the bill to the drawee bank

A term bill is like a post-dated cheque and is payable on a fixed date in the future.

Options with a term bill of exchange

With a term bill of exchange, you can:

  • Wait for the due date to collect the full payment, or
  • Sell the bill (once it's been accepted) at a discount to get cash early.

So, for example, if the buyer wants a credit period, e.g. 60 days, you could agree that the buyer pays with a term bill of exchange payable in 60 days from the date it's drawn. The 60th day would be the due date. The buyer wouldn't need to pay until this date.

However, if you wanted to get cash in the meantime, you could sell the bill at a discount before the due date. You'll first need to have the drawee bank 'accept' the bill of exchange by signing it. The bill would then become saleable. Anyone buying it from you would pay less than the face value of the bill (i.e. they would buy it at a discount) because they'd need to wait until the due date to collect the full amount of the bill from the drawee.

Letters of credit

You could use the bill of exchange (see above) in conjunction with a letter of credit.

Letters of credit is a method that offers a compromise for both of you.

For more information, see Letters of credit.