How you determine the terms and conditions of your pricing and payment profiles impact your commercial risk. To assist your considerations we have prepared the following to assist you in determining your export pricing policy.
For Foreign Exchange Considerations, click here.
The pricing of a contract will reflect the costs and responsibilities of the contracting parties. The more responsibilities, the more costs you have to cover and fix in the contract.
Export pricing usually starts with the domestic price (e.g., cost of goods, plus profit). Discounts for overseas representation may then be factored in. From that price, Incoterms determine additional costs.
The main options for export pricing are:
For further information regarding international pricing and payment terms see IncoTerms 2020 from the International Chamber of Commerce.
The payment terms agreed in a commercial contract will reflect the risks run by both supplier and buyer.
There are four primary payment terms:
Payment in advance before shipment may seem to be the most desirable method of payment as it supports your working capital and you will receive payment before the ownership is transferred to the buyer. However, this is the least attractive option for the buyer as it increases risks for the buyer.
Advance payment could be considered essential when you have limited confidence in your buyer or when the political or economic situation in your buyer’s country increases the risk of non-payment.
A Letter of Credit is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions set out in the Letter of Credit have been met. This offers a guarantee to the seller that they will be paid, and the buyer can be sure that no payment will be made until the goods have been shipped.
Suppliers must ensure that all the requirements listed in the agreement such as latest shipping date and mode of transport have been adhered to, and that all documentation requested can be provided; otherwise your bank will not be able to claim payment from the issuing bank.
These work like Letters of Credit, however, there is no bank guarantee of payment. The shipping documents, together with a bill of exchange are sent to the Buyer’s bank. Once the Buyer accepts the bill of exchange, they are legally liable for payment and the bank releases the shipping documents to the Buyer.
This method provides you, the exporter, with greater control than with open account transactions as documentation is passed through banking systems – and bills of exchange (usually) provide a better claim for payment than contracts and invoices.
With Open Account, payment is made after the Supplier has sent the goods to the Buyer. This, therefore, represents the greatest risk to the Supplier. The demand for your product, your price and how badly you need to do the business will all affect what terms you decide to offer. To mitigate the risk, it may be an option to take out credit insurance.
Letters of Credit, Documentary Collections and Open Account can also allow for:
You should note, however, that in exporting, advance payment is rare. Foreign buyers generally will only pay fully up front for smaller shipments. Although they might agree to a partial down payment if it is the only way to get the goods, they will usually insist on payment upon delivery, or preferably sometime after delivery. Therefore, you are likely to push for a Letter of Credit or Documentary Collection.
N.B. You can also consider the discounting of your invoices with Ebury (see the Sub-Section in: Find Funding).