Table of Contents
What is the International Payment Term?
You pay for the goods you buy from the local market. Same as that you need to pay for the goods & services you buy from the international market. One business (Buyer) from one country buys goods from a/few businesses (Supplier) from another country for the production of another good or for sale. For that, there are methods we make the payment to those suppliers. Those methods are internationally recognized and agreed upon. Commonly known as international payment terms. These terms avoid disputes between suppliers and customers with regard to the payments unlike in local payments.
Whatever the payment term you use, there should be a tenor to count the payment date.
What are the Common Terms of Payment?
- Advanced Payment
- DP – Documents Against Payment
- DA – Documents Against Acceptance
- LC – Letter of Credit
- Open Account
- Consignment Basis
Wants to know on CusDec?
International Payment Terms in Detail
01. Advanced Payment
As the name reflects payment arranges in advance. Sometimes Supplier starts production after the customer made the payment. There are times where the supplier request buyer to pay a percentage from the invoice value before the mass production. And pay the rest of invoice value after production completion, goods shipped to the Consignee or after goods are on board. In some cases, you may have seen 80% Advance + 20% After 30 Days from invoice date. Here payment term is a mix of advanced & DA payment terms. You may have seen cases where payment term mentioned as 100% on BL or TT on BL. Here the customer request to make the payment only after they received the draft BL and still payment term goes as advanced payment
Remember If payment should make upon receiving the BL, consignee should present the BL to the bank in order to arrange the payment. If the payment is on draft BL (100%TT on Draft BL). In such, payment should arrange once the customer receives the draft BL instead of waiting for the final BL.
However, if the payment for the goods does before shipping. It consider as an advance payment in international payment terms.
What is Telex?
You might have heard people saying Telex/ Telegraphic payment or TT payment. Did you ever wonder about the difference between Telex and advanced payment? Telex or the telegraphic transfer (TT) is the method used by banks to inform another bank about payments made by one party to another (Buyer to Supplier). Most people call Telex to the advanced payment. Do remember Telex is only a method uses to do interbank communication and payment term should properly mention as advanced payment.
What are the Documents Need to Arrange Advanced payments?
Proforma Invoice signed or stamped by the seller
Do remember advanced payments arrange against the Proforma invoice not against the commercial invoice. Request a Proforma Invoice (PI) from your supplier. Please check whether the supplier has mentioned the payment term as “Advance” & their bank details in PI properly.
After the Payment…
Make sure to collect the payment advice / Debit advice or the SWIFT copy from the bank as you need it for Customs clearance. Remember you do not have to present original documents for shipment clearance when the payment term is 100% advanced. Endorsing copy documents from the bank would be enough. Hence you can ask supplier just to email scan copies of original documents to save waiting time for original documents.
What is Endorsing copy documents?
Present the copy of original invoice, packaging list, BL and payment advice to the bank. Then they will chop it with their seal and confirm the payment you made beforehand is tally with the commercial invoice and payment is properly made to the supplier. Bank will mention the reference number in debit advice or the SWIFT copy in the invoice. That indicates payment you have made under the mentioned reference number is for the invoice bank has chopped.
02. Documents Against Payment| DP Term
In order to clear the shipment from Customs, you need the original documents of the cargo. Under DP term supplier send the original commercial documents to the buyer’s bank through suppliers bank. You can collect the original documents after you make the payment for invoice value. DP term is also known as CAD where CAD stands for Cash Against Documents or NCAD where NCAD stand for Net Cash Against Documents
There are cases supplier directly send original commercial documents to buyer’s bank without going through suppliers bank. In such situations, the supplier should include their bank details separately to the document set in order to affect the payment under DP term. In common, the supplier sends the original BL with the documents without surrendering. Most of the banks have their own formats for the supplier to fill and include in to document set when supplier send documents directly to buyers bank. We call this format as “Direct Covering Letter or Direct Collection Order”
03. Documents Against Acceptance| DA Term
This term goes as Documents Against Acceptance where supplier offer a credit period to the buyer. Most commonly, DA 30 Days, DA 60 Days and DA 120 Days use as DA terms. The supplier will offer the credit period from the invoice date or the BL date. When the term is DA, the supplier sends the original documents through their bank to the buyer’s bank. Without making the payment bank chop the original set of documents and release to the buyer to clear the shipment. Buyer is entitling for an agreed credit period. At the same time, obliged to arrange the payment within the agreed period. When the payment term mention as Net 30 Days, Net 60 Days that means payment should arrange within 30 days, 60 days from invoice date. Keep in mind to mention the tenor in your payment term.
Same as in DP term supplier might send an original set of documents to buyer’s bank directly without going through their bank. with the direct covering letter
When the term is DA, include the Bill of Exchange to the documents. Remember, the buyer must sign the bill of exchange and hand over to the buyer’s bank.
One more thing to remember… If the BL is surrendered First, need to go to the shipping line and collect the DO. Present it to the bank for the bank to release the original documents. If the BL is “Original” first collect documents from bank and handover one original BL to shipping agent when obtaining D/O (Delivery Order) from them.
04. Open Account Payment
Open account is also a DA payment term but a more convenient way for buyers. Here no bank involves for the transfer of documents. Supplier directly sends the original documents to buyer and buyer do the clearance with the payment term open account. Here the supplier gives a credit period to the buyer. Upon the given period buyer present the “Commercial Invoice, CusDec (Customs Declaration), & BL” to bank and arrange the payment. This method can practise when there is a good relationship between supplier & buyer. The reason is, there is a risk for the supplier on receiving the payment since no bank involve guaranteeing the payment
What if the payment term is a mix of Advanced and DP/DA Payment Terms
Consignee needs to arrange the agreed percentage of the invoice value in advance. If there is a balance to be paid as DP (Documents against payment ) or DA (Documents against acceptance), Original documents set should send to the buyer’s bank by the seller. For cargo clearance, original documents should present. Further, the balance payment should make as agreed under DP or DA. Bank will endorse the documents as per the payment term mentioned in the commercial Invoice and release to the buyer.
Letter of Credit| LC
Letter of Credit is a quiet vast area. Due to the factors like distance, different laws in countries as well as not practical to know the parties involved in the transaction personally, LC plays a crucial role in international business. Safest payment method for both buyer and supplier. Remember if you are going to buy a vehicle making payment through a LC is a must in Sri Lanka. First, we will investigate the industrial jargon related to the LC.
The applicant is the party who apply or fill the application and open the LC from a bank. The applicant is always the buyer or consignee
The party who enjoy the benefits of opening the LC by monitory terms is the beneficiary. In a business beneficiary is the supplier
Advising bank is the supplier’s bank or the bank which receives the LC
As the name reflects issuing bank is the bank which issues the LC, since buyer applies for the LC buyers bank will be the issuing bank
When advising bank and issuing bank has no direct dealing negotiation bank act as an intermediary bank to make sure the banking process go smoothly
Latest shipment date
Before this date shipment should be departed from the origin. Commonly known as LSD. LSD will be decided by the agreed date of shipment in between supplier and buyer
LC Expiry date
By this date, the shipment should have departed from the origin and original documents should have sent to the buyer’s bank. Normally after the shipment sailing date, there is a time period given to supplier in order to finalize the documents and send them to the buyer’s bank. The expiry date can be calculated once the document presentation period is added to the latest shipment date. When filling the LC application if the buyer has not mentioned the document presentation period it is automatically taken as 21 days as a standard practice
LC Expiry Place
LC expiry place should be the country of the supplier
Documents Required to open a Letter of Credit
- Duly signed Proforma Invoice or Sales Confirmation issued by the supplier
- Request letter to the bank asking to issue a LC for requested supplier
- Duly filled LC application issued by the bank
- Central Bank form
These documents can be slightly vary with your country’s regulations.
The buyer has the right to open the LC. Once the buyer submits the required documents to the bank, the bank will open the LC. Same as in DP and DA terms once cargo dispatched from origin country Shipper will send the original documents to buyer’s bank through supplier’s bank. Once the bank receives the documents, they will cross-check the documents with the filled LC application. If there are any discrepancies bank will inform the buyer. If the buyer has no issue regarding the discrepancies bank will endorse and release the documents. Here when releasing the original set of documents bank take the responsibility to make sure, the buyer makes the payment and supplier will receive the full payment timely.
According to the Uniform Customs and Practice for Documentary Credit (UCP) LC has standard rules & reregulation. Further UPS interpret LC as an “Irrevocable” document, so one party cannot change agreed terms in the original LC in legal nature. This encourages both seller’s & buyer’s to engage in large scale international businesses with legal protection.
If the payment term is LC at sight: Bank will remit the payment value to the supplier’s bank account and release the original document set related to the LC
If the supplier offers a credit period it will mention as LC (credit period) from (Invoice date /BL date)
Ex: LC 60 Days from BL date/ LC 30 Days from invoice date
By the due date, the bank will credit the invoice value from the buyer’s account to the supplier’s account.
Consignment Account Basis
Here transactions happen in both ways. The consignee in one transaction becomes the seller in another transaction. Same goes with the seller too. In consignment accounts, both parties agree on a date to settle their account. This time period can be a year, once in every three months or whatever the date preferred by parties.
I know.. you need to see below example to have a clear picture on the consignment account basis.
Imagine person A from country C deal with person B in country D. A send tea to B, while B send garments to B. Under this payment term, A and B don’t arrange payments for each shipment. At the end of the agreed period, they check the goods flow and find who should pay to whom. Then, they will settle the account.