There are various methods by which importers and exporters can address the tensions between a buyer and seller concerning payment for goods in international sales.
For a seller, ideally a buyer would make payment before goods are shipped which avoids the risk of chasing payment from an overseas buyer. Buyers are often understandably reluctant however to pay for goods they have not taken delivery of.
- Bankers’ letters of credit (documentary credits)
- Collection Arrangements
- Export Credit Agency Finance
Letters of Credit (documentary credits)
Also known as documentary credits, letters of credit allow a seller to receive payment for goods as soon as they are shipped and the buyer knows when payment is made that the goods have been shipped. The buyer will deposit funds with a bank which will make payment to the seller on receipt of agreed documents, usually the seller’s invoice with details of the goods and breakdown of price, a certificate of origin of the goods and transport and insurance documentation.
This represents a great simplification of the procedure which sometimes involves multiple banks and branches in the different territories involved in the transaction. It is still very important that a seller takes care. Fraudulent letters of credit issued or advised by fictitious banks do sometimes occur.
In direct reversal of the above, under a collection arrangement, the seller’s bank acts as agent of the seller and takes instructions from the seller. Exchange of ownership and payment however take place at the buyer’s premises on receipt of delivery.
Export Credit Agency Finance
The UK government provides partial guarantees to UK banks in support of UK exports. The ECGD which also operates under the name UK Export Finance provides insurance to exporters and banks against the risk of non-payment by overseas buyers. The advantage to the buyer is they can access credit from an exporter or from lenders and so spread the cost of payment over time, whilst sellers can receive payment upon delivery. Other countries provide similar trade finance arrangements however they are not without risk.
Whichever method is adopted it is very important to make sure that the agreement is properly documented in the Contract for Sale between the Seller and Buyer, that appropriate documentation is entered into with the banks supporting the arrangement and that all parties involved (including the banks) take advice from their respective solicitors.
If you need advice on securing payment and delivery in international sale of goods transactions, contact Farleys commercial solicitors on 0845 287 0939 or submit your enquiry through our online contact form.
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