AboutRichard Barr Expertise My professional expertise is International Banking, concentrating on the areas of Money Transfers/Payment Systems and Int`l Trade Finance. Due to the high amount of travel my job requires, I am competent to give information concerning "Business Travel" as well.
Experience I have over 18 years of combined Banking/Trade Finance experience. Spreading over 4 continents. Having spent 5 years at Wells Fargo Bank provided me with a solid background in banking. After that, I moved to Israel and worked in Import/Export for 3 Years. Followed by another year as the resident expert in trade finance for the Jerusalem region of a medium sized bank. Capitalizing on my proficiency, I moved into the high-tech world where I remain today as a Business Analyst/Project Manager/Consultant for Payment Systems and Operations Risk.
Education/Credentials Certificate in Speech Communications, AA in General Business. Both from Mission College, Santa Clara - California. BS in Int''l Business/Bus. Admin. From San Jose State University, San Jose - California
Question We are selling some large used manufacturing equipment from USA to Toronto, ON. THe buyer is nervous about paying us a large amount of money without knowing us and we are nervous about shipping large pieces of equipment without prior payment. THe equipment, I am sure, will be very costly to ship, let alone duty and custom fees. Do you have any suggestions?? thanks!
Answer Dear Marsha,
There are a number of points to consider. Not the least being the payment types available. Here's a short list.
A letter of Credit (LC) is an internationally recognized instrument issued by a bank on behalf of its client, the purchaser. The LC actually represents the bank's guarantee to pay the seller, provided the conditions specified on it are fulfilled. Of course, the purchaser pays its bank a fee to render this service. The rationale behind the use of an LC is reliance by the seller on the credit worthiness of the bank, which is normally more reliable than that of the purchaser. It is also easier to verify by the seller's bank. Moreover, this vehicle can be structured to protect the purchaser because no payment obligation arises until the goods have been satisfactorily delivered as promised. The greatest degree of protection is afforded to the seller when the LC has been issued by the buyer's bank and confirmed by the seller's bank. LCs may be utilized for one-time transactions, or they can cover multi-shipments, depending upon what is agreed between the parties.
Collection (Drafts) involve the use of a draft, drawn by the seller on the buyer, requiring the buyer to pay the face amount either on sight (sight draft) or on a specified date in the future (time draft). The draft is an unconditional order to make such payment in accordance with its terms, which specify the documents needed before title to the goods will be passed. Because title to the goods does not pass until the draft is paid or accepted, both the buyer and seller are protected. However, if the buyer defaults on payment of the draft, the seller may have to pursue collection through the courts (or possibly, by arbitration, if such had been agreed upon between the parties). The use of drafts involves a certain level of risk; but they are less expensive for the purchaser than letters of credit.
When goods are sold subject to consignment, no money is received by the exporter until after the goods have been sold by the purchaser. Title to the goods remains with the exporter until such time as all the purchase conditions are satisfied. As a practical matter, consignment is very risky. There is generally no way to predict how long it might take to sell the goods; moreover, if they are never sold, the exporter would have to pay the costs of recovering them from the foreign consignee.
An open account transaction means that the goods are manufactured and delivered before payment is required (for example, payment could be due 14, 30, or 60 days following shipment or delivery). In the United States, sales are likely to be made on an open-account basis if the manufacturer has been dealing with the buyer over a long period of time and has established a secure working relationship. In international business transactions, this method of payment cannot be used safely unless the buyer is credit worthy and the country of destination is politically and economically stable.
After having read of these types, which type suits you best as the seller?
What type of relationship do you have with your buyers? What will they accept and won't they?
What type of relationship do you have with your bank?
After answering these questions, you'll be able to better determine what payment terms to use. I can't do that for you at a distance with only a half glimpse of the business you provide, but my answer should make easier for you to decide.
