Do you ever find yourself wondering what the best way is to receive payments against invoices for your business? If so, you probably already know that there are lots of ways, both old and new!

Each of these ways have their own advantages and disadvantages. Some tend to have far more financial disadvantages than others, and should probably be avoided whenever possible.

Here we examine the best ways to receive payments – and the pros & cons of each method for your business.

Cheques

The use of cheques has dropped massively thanks to modern technology, yet a surprising number of businesses are still using them to pay employees and suppliers. It’s very likely a few of your customers may still prefer to pay you by cheque.

Pros

• Can now be processed electronically via ATMs and Mobile Banking.
• It costs nothing to accept a cheque and most banks won’t charge you to deposit one.

Cons

• Getting a cheque does not guarantee payment. Cheques can bounce, and this can cost you money and challenges in managing your working capital.
• Sometimes when you deposit a cheque, your bank will put some of the funds on hold temporarily.
• If your bank does not have state of the art technology, you will have to take a trip to your bank and wait in the infamous banking line to deposit your payment.
• Many businesses that pay by cheque do so via mail. Millions of letters get lost by postal providers every year- cheques should never be mailed!
• International cheques may take up to 2-3 weeks to get cashed, thus further delaying receipt of the money you need to run your business.

Wire Transfers

Wire transfers are a popular method used worldwide to send payments both domestically and internationally. These transfers use wire networks that essentially act as a messenger between the banks in an electronic money-sending transaction.

A wire transfer requires a considerable amount of trust between the payer and the payee, as a lot of details need to be shared between the two.

Pros

• Payments via wire transfer go directly into your bank account.
• Wire transfers can be used to receive money from employers/clients overseas.

Cons

• Can take up to 5 business days (and sometimes longer) to be processed, meaning you could be waiting a while for your payment to come through.
• Oftentimes the recipient will be subjected to a receiving fee by their bank, meaning you never get paid 100% of your invoice amount. For example, in Canada, some banks charge a $15 fee to receive a wire transfer.
• You will have to gather all of your bank details and share them with the sender. Sometimes a call or a trip to the bank will be necessary to obtain SWIFT codes, Intermediary bank SWIFT / Routing code, etc.
• Usually, wire transfers are denominated in a major currency like the US Dollars. When selling US Dollars at your bank (e.g., to receive a converted amount in Canadian Dollars), you would be paying a conversion fee as a percentage of the amount you are receiving to your bank based on their current USD buying rates.

Cash

One saying we’ve all heard is that “cash is king” – but has its time come and gone?

Being paid in cash is not very common outside of certain industries, and while it sounds great it is not without its problems.

Pros

• Instant cash in hand, no waiting on funds to become available.
• There are no transaction fees with like there are with wire transfers.

Cons

• Cash is riskier to carry. If you carry cash you may be a victim of theft and lose all your earnings.
• Fraud risk – Cash can be easily stolen at a cash pickup point.
• You will have to make frequent trips to the bank to make cash deposits, which can take up a lot of your time – and you have to rely on banking hours!
• Cash on your company’s premises means there is the potential of theft from both insiders and criminals.
• If your business is in retail or otherwise needs to regularly deal in cash, you may have to invest in secure storage, 24 x 7 surveillance, security vans, etc.

Irrevocable Letter of Credit (ILOC or LC)

You may not have heard of an Irrevocable Letter of Credit – they are quite common for large value contracts but no so much for smaller values or where trust is already established between buyers and sellers.

An LC is a guarantee to the receiver, issued as a commercial document, by a bank. They are most commonly used to facilitate international trade between two parties that are unfamiliar with each other.

Pros

• LCs are issued at your client’s request in your favour.
• An LC means that the bank must pay you, even if your customer defaults.
• You can issue an LC for both domestic as well as international contracts.

Cons

• Once the document has been issued, it cannot be modified without both parties’ consent. The language and phrasing in the documents is crucial.
• If not done by an experienced professional, you could end up being burned due to an unforeseen loophole you unknowingly created.
• To ensure things go smoothly, you will have to talk with your bank. You may even have to arrange a meeting with a specialist, and this can all be rather time consuming.

Money Service Business (MSB)

An MSB is a non-bank financial institution that transmits payments or converts currency.

Money service businesses are a great way to both send and receive money internationally and domestically.

Pros

• Many MSBs use state of the art technology to which banks do not have access.
• Some MSBs ensure payments are received with 1 business day, if not instantly.
• More often than not, using an MSB is several times cheaper than using wire transfer.
• MSBs adhere to FINTRAC regulations in the same manner as a bank.

Cons

• Some MSBs are not geared up to handle business transactions and are limited to personal remittances.
• You may need to look around to ensure you find the best MSB for your needs.
• You want an MSB with the right banking arrangements, a transparent fee structure, modern technology based systems, and great customer service.

My recommendation

Using an MSB has become the preferred choice for many businesses who need to send and receive payments internationally.

The post The pros and cons of accepting different payment methods for your business appeared first on Trade Ready.

While in contract negotiation, the payment method and payment terms must be specified and agreed upon. There are various factors that will influence the methods of payment and payment terms, including:

• Location of the importer
• The supplier
• Previous business relationships of the two parties

Mutual assessment of the risks involved in the transaction will influence the method of payment and payment terms. The importer runs the risk of paying for goods that are not received, or that are not received as ordered, and the exporter risks shipping goods but not receiving payment.

To be effective, the agreement must balance these risks and satisfy both sides so that the deal is worth undertaking. When and how payment must be made for goods and/or services is a matter of negotiation, and are part of the terms and conditions of the contract.

The purchasing company will normally want to defer payment and secure the longest possible time between the date when products are received and the date funds are transferred. During this time, the importer can verify the quality of the shipment, evaluate product performance and minimize the risk of fraud. The importer might even wish to save on financing costs by selling the goods before paying for them.

On the other hand, the exporter will want to be paid as quickly as possible, even to the extent of receiving payment before shipping the ordered goods. As the payment objectives of the importer and exporter pull in opposite directions, the payment terms agreed upon in a contract often reflect the relative strengths of the two parties.

What are my options for payment methods?

There are different methods of arranging payment that are available to an exporter. These include:

• Cash in advance or prepayment
• Documentary letter of credit
• Documentary collection
• Open account

In addition, consignment—while not a payment method—is another way of structuring a transaction between the importer and exporter. In a consignment deal, the exporter retains the title to—or ownership of—a shipment of goods, using the importer as an agent to sell those goods. The importer then remits the proceeds after selling the goods to a foreign customer. If the goods are not sold, the agent will return them to the exporter.

With respect to services, when there are no goods to serve as collateral, often only the simplest payment terms are used, such as open account and cash in advance or prepayment. Therefore, service providers tend to break their work into smaller tasks/objectives with more frequent payments to minimize the exposure associated with non-payment. In some instances, service providers could insist on a letter of credit for payment provided that the importer and exporter can agree on documentary evidence from the work performed that would suffice for the release of payment.

Want to learn more about all aspects of how to manage business costs and cash flows, ensure payment and stay profitable long-term? Get started with the FITTskills International Trade Finance online course!

Developing your schedule of payments

When an exporter and importer are negotiating a contract that is spread over a period of time, parties tend to outline a schedule of payments that defines the dates at which payments are made from the importer to the exporter. When contract duration is long (e.g. 12 months or more), a schedule of payment is based on various milestones that will be reached during the contract.

Milestone-based contracts are much easier to control and payments are based on achieved results. The success of such contracts lies in the wisdom of defining the milestones, which should be justified to both client as well as contractor. In this way, the percentage of the contract that has been completed can be evaluated and the payment that is due can be assessed. In addition, scheduled payments can either be parameterised or customized.

What is a parameterised schedule?

A parameterised schedule is generated based on a set of rules and market conventions to define the frequencies of the payments. These parameters include:

• Payment frequency: Annually, semi-annually, quarterly, monthly, weekly, daily, continuous
• Payment day: The day of the month on which the payment is made
• Date rolling: The rule used to adjust the payment date if the schedule date is not a business day
• Start date: The date of the first payment
• End date: The date of the last payment, also known as the maturity date

What is a customized schedule?

A customized schedule consists of a series of dates that define exactly when payments will be made and is tailored to the expected progress of the contract over its duration.

The following image shows a sample of a schedule of payment.

The post Learn how to select the payment methods and terms that work best for your business appeared first on Trade Ready.

I think just about everyone’s had that feeling at some point. But it’s easier to deal with when the conversation turns to a subject you know nothing about – maybe open heart surgery, theoretical astrophysics, or fantasy football stats.

The panic you feel when it’s a conversation in your own field, however, is so much worse. We want to help you get up to speed, and have an easy way to explain these global business acronyms to others.

If there are any acronyms that aren’t covered here, just let us know in the comments below and you may see them featured in a future article.

1. FTZ (Foreign/free trade zones)

FTZs are special areas created by countries, usually encompassing ports, where goods can be shipped, processed and stored duty-free, and then re-exported without additional charges. Duties must only be paid if the goods are moved from the FTZ into the rest of the country.

It is most commonly referred to as a foreign trade zone within the U.S., and a free trade zone in the rest of the world.

2. HS (Harmonized System, or Harmonized Commodity Coding and Description System)

HS is a system used to classify goods to determine what customs tariffs apply to it when exported or imported, as well as to gather statistics on international trade, monitor controlled goods and determine taxes. There are about 5,000 commodity groups, each of which has its own 6-digit code to identify and classify it. This system is used by over 200 countries and is applied to over 98% of merchandise shipped around the world.

3. IMF (International Monetary Fund)

Originally created in 1945, this global organization is headquartered in Washington DC and currently has 189 member countries. Each member contributes funds on an annual basis. Any country experiencing problems with their balance of payment is able to receive a loan from the IMF to resolve their issues, rather than having to reduce imports or drastically cut government spending. The organization also collects detailed statistics on the global economy to evaluate future economic changes.

The main difference between it and the World Bank is that while the IMF gives interest-free loans to many developing countries during crisis, aiding developing countries is not its primary mission. The World Bank, in contrast, is set up to provide loans to developing countries for programs intended to reduce poverty or help the poorest sections of their populations.

4. JIT (Just in time)

JIT is a methodology for inventory and manufacturing where materials or products are ordered as needed based on customer demand, rather than having stores of inventory ready in advance. Many have advocated for it because it reduces waste, and reduces storage and real estate needs for many companies, though it does require greater coordination between suppliers and businesses. While it runs the risk of shortages due to delayed shipments or errors, it is generally applauded for its efficiency.

5. L/C (letter of credit)

A letter of credit is a document that a person or company buying goods or services can ask a bank to create. It promises to whoever is selling the goods or services that a specified amount of money will be paid to them once the bank receives the requested documents – and within a certain time frame. It is also known as a documentary letter of credit or a documentary credit.

The bank has to pay the seller as long as all documents are presented according to specifications, so it’s one of the most common ways to guarantee payment in international trade transactions.

6. MOU (memorandum of understanding)

An MOU is a signed agreement between at least two parties detailing points of agreement which can be used to move forward with future partnerships, contracts or other forms of closer business relationship. MOUs are often not legally binding unless they meet specific criteria, which vary between countries, but can be used as the first step in creating a binding contract or agreement.

7. OECD (Organization for Economic Cooperation and Development)

The OECD is an organization of 35 countries, including many of the world’s most developed and prosperous economies. Its members are supporters of democracy and market economies, and work through the organization to promote economic prosperity and trade growth, among other issues. Along with providing economic data and predictions, the organization has played major roles in anti-bribery and anti-spam efforts, as well as advocating for greater openness in sharing financial data.

8. SWIFT (Society for Worldwide Interbank Financial Transactions)

SWIFT is the network through which banks transmit and receive financial transactions from one another. As a secure method used by over 9,000 different banks worldwide, it is the most common way for transactions to be sent to other banks. It does not, however, serve as a way to transfer money, but acts as a facilitator, communicating between banks.

9. TEUs (Twenty foot equivalent units)

TEUs are the standard unit of measure used to determine the capacity of cargo containers, or the ships and terminals which store or transport them. A standard cargo container is 20 feet long, or 1 TEU, and eight feet wide. Though the height of a container can vary, a 1 TEU container is usually about eight and a half feet tall.

Along with twenty foot containers, the other popular size is forty foot long (2 TEUs) containers. Forty foot containers are often used to ship goods by sea, and are the standard sized container shipped by semi-trailer (transport) trucks.

Forty five foot long containers are also used by some shipping companies, and confusingly are often measured as being 2 TEUs, rather than 2.25 TEUs.

10. USTR (U.S. Trade Representative)

This position within the U.S. government is the highest related to international trade. Along with overseeing around 200 employees in the Trade Representative Office, the USTR develops and recommends trade policies for the President, works to negotiate trade agreements and coordinates trade policies with other government departments.

The post Your guide to 10 global business acronyms you need to know appeared first on Trade Ready.

International sales can mean delayed payment and can carry its own payment security risks. It’s certainly easier to collect in Toronto than in Tokyo, or in New York than Nigeria. International collections usually involve increased delays, administrative burden, legal costs and additional complexity.

So how does one provide payment security for international sales and improve cash flow?

Understanding the payment security spectrum

Let us first review the range of one’s payment security options. The first, “open account”, is most favorable to the buyer and least favorable to the seller. On the other end of the spectrum is “payment in advance”, which is least favorable to the buyer and most favorable to the seller. Here are all five options across the spectrum:

1. Open Account
2. Documentary Collections (Documentary Draft – The Reverse Check)
3. Letters of Credit
4. Confirmed Letters of Credit
5. Payment in Advance – Inclusive of Partial Payment in Advance

You may find the ends of this spectrum to be hard to pitch to either the seller or buyer. With new or unproven customers, the seller will be hesitant to ship goods on open account, with no guarantee of payment. On the other end of the spectrum, few customers are willing to prepay and trust a vendor to ship goods, with no guarantee of shipment.

Note one exception, however. Partial pre-payment (or progress payments) are standard in certain industries. For example, construction companies or large equipment companies may require progress payments at certain stages of a project (e.g., a percentage payment upon issuance of a purchaser order, a further percentage payment upon approved drawings, a percentage payment upon purchase of major materials, etc.).

If you are not in an industry that routinely relies on pre-payment, avoid the extremes of sales on open account vs. prepayment by utilizing a documentary draft or a letter of credit.

Here’s why the documentary draft usually works well for both buyers and sellers

The documentary draft (or bill of exchange, as it may be called) is a special type of negotiable instrument, like a reverse check, that is commonly used to expedite payment. It provides the seller with the security of not permitting the buyer to possess the goods until the draft is paid, or is authorized to be paid.

Moreover, in the event of the buyer’s failure to pay, it permits a seller or the international bank involved in the transaction to sue the buyer, based on the draft alone, without having to prove the terms of the underlying sales contract.

How does the draft work?  The seller ships goods, generates appropriate documents (e.g., commercial invoice, certificate of origin, etc.) and also receives documentation from the shipper (e.g., bill of lading).

We will collectively refer to these documents hereafter as the “title documents”.  The title documents are then forwarded to the remitting bank (the seller’s bank), which in turn forwards the title documents to the collecting/presenting bank (usually the buyer’s bank).

The collecting/presenting bank compares the title documents to the draft’s requirements. If the documentation is in order, payment may be authorized and the title documents are released to the buyer. With the Title Documents in hand, the buyer can then retrieve the goods.

This is a relatively simple and inexpensive payment method. It often provides for more prompt payment than an open account, and the seller has the security of retaining title to the goods until payment is authorized by the buyer.

While this method is more secure than an open account transaction, there is still some risk that the buyer may reject the documents or otherwise renege on the transaction. The banks do not guarantee payment of the draft.

If all else fails, a letter of credit may be better for securing payment

If a seller is unwilling to risk the customer’s potential refusal to honor a documentary draft, they may prefer that a letter of credit is used to secure payment. In this manner, the buyer’s bank guarantees payment and the buyer hasn’t the discretion to reject payment. In this case, the seller must transmit title documents (as defined above) that satisfy the conditions of the letter of credit.

The letter of credit transaction begins with the seller and buyer agreeing to a letter of credit format and terms. For instance, the buyer might call for the letter of credit to require that the bill of lading be negotiable or marked “freight prepaid,” or that the packing slip or certificate of analysis contain certifications as to quality, weight or markings.

The buyer will then request its bank (the issuing bank) to issue the letter of credit in favor of the seller. The letter of credit is forwarded to a bank nearer to the seller’s place of business, and this bank (the advising bank) notifies the seller of its receipt of the letter of credit.

Presuming the seller ships goods prior to the letter of credit’s expiration date, the seller generates and obtains the title documents (e.g., commercial invoice, bill of lading, etc.).

These title documents are then forwarded to the issuing bank, which will effectuate payment in the event the documents meet all requirements of the letter of credit. The issuing bank will release the title documents to the buyer, who can then claim the goods.

Similar to documentary drafts, letters of credit may be “sight” letters of credit, where payment is effectuated promptly upon the issuing bank’s acceptance of the required title documents, or “time” letters of credit, which provide for payment some period after acceptance of that documentation.

For an additional charge, the seller may overcome concerns that the foreign issuing bank may not honor the letter of credit, whether for unscrupulous reasons or due to financial solvency issues. This is done by paying for the letter of credit to be “confirmed.” Generally, the seller pays its own bank to confirm (that is, guarantee) payment in the event the issuing bank fails to do so.

When using them, ensure that letter of credit costs (including confirming costs, if applicable) are included at the bid stage so your margins are not later decreased by this amount. Use only reputable banks. Insist upon an irrevocable letter of credit rather than one that is revocable. Ensure that the documents you forward to the issuing bank strictly comply with letter of credit requirements – failing to do so may result in late payment or, in the event of a delay beyond the letter of credit expiration date, possible non-payment. Become generally familiar with the Uniform Customs and Practice for Documentary Credits to understand the rules of the issuance and use of letters of credit.

If you want to expedite international payments and be more assured of payment, use the documentary draft or letter of credit.  Your CFO will love you for it.

The post Show me the money! Securing payment for international sales appeared first on Trade Ready.

The course was very useful for me, says Ahmed, who works as a Letter of Credit (L/C) coordinator for ZamZam Group in Baghdad. International trade is the core of our business.

ZamZam is Iraq’s largest importer and assembler of motor vehicles, and it works with international brands such as Volvo Trucks, Chevrolet and Isuzu.

After completing the FITT course, which was offered by the Central Bank of Iraq in association with USAID, Ahmed went back to his manager with new information about lines of credit (as distinguished from L/Cs) as well as export credit agencies.

Getting past the cash flow squeeze

In the past, ZamZam had been using confirmed L/Cs in their dealings with companies like Volvo Trucks in Sweden. However, since L/Cs in Iraq need to be backed by a cash deposit, this process would often tie up their capital for six months and negatively affect their cash flow.

Equipped with the new international trade knowledge, Ahmed and his colleagues were able to go to Volvo with a proposal for a line of credit guaranteed by Swedish export credit agency AB Svensk Exportkredit.

It’s still a work in progress but we are making progress using the information we got from the course. And since no one else at our company knows much about these processes yet, my colleague Hussein and I have been put in charge of finalizing the entire project.

Ahmed and colleague Hussein Huda Abdul Ameer have met with AB Svensk Exportkredit and are working to determine with which bank ZamZam should open its line of credit.

Opening doors to new business internationally

“Opening a line of credit for us with Volvo is going to provide us with a lot of opportunities,” says Ahmed. “One of the most beneficial of which is that we will be able to open L/Cs and defer payment. We’ll be able to open the L/Cs, get our goods and pay them after 90 days. This is going to give us a lot more cash flow.”

And more cash flow can translate into more growth and international opportunities for a company like ZamZam. It can also create a positive effect on the economy of Iraq in general.

Because of their success with the International Trade Finance course, Ahmed and Hussein also decided to take the Legal Aspects of International Trade course, which wrapped up at the end of October, 2013. Both are hoping to enroll in more FITTskills courses in the future. Although the courses being taught in English creates a barrier for some at ZamZam, Ahmed says many of his other colleagues will also be interested in taking them.

“Companies like ours can really benefit from these types of courses,” he says.

The post Line of credit improves cash flow and creates international business opportunities for automobile importer appeared first on Trade Ready.