In international trade, the biggest fear for an exporter is shipping goods and not getting paid. Conversely, an importer fears paying and never receiving the goods. Professionals bridge this gap using specific payment terms and insurance tools to manage risk.
1. Payment Methods (Ordered by Safety)
Logistics and trade professionals use a spectrum of payment terms to balance risk between the buyer and seller.
Letters of Credit (LC) — The Gold Standard
An LC is a guarantee from the buyer’s bank that the seller will be paid as long as they provide the correct shipping documents (like a Bill of Lading).
- Risk Level: Very Low. The credit risk shifts from the buyer to the bank.
- Best for: New business relationships or high-value shipments.
Advance Payment (100% T/T = 100% payment from Buyer’s bank to your bank)
The buyer pays the full amount via telegraphic transfer (T/T) before the goods are shipped.
- Risk Level: Zero for the seller; Maximum for the buyer.
- Best for: Small samples or highly trusted, long-term partners.
Documents Against Payment (DP)
The exporter sends the shipping documents to a bank. The buyer can only get the documents (to claim the goods at the port) once they pay the bank.
- Risk Level: Medium. If the buyer refuses to pay, the goods are stuck at the port, and the exporter must pay for return shipping.
Open Account
The goods are shipped and delivered before payment is due (usually 30, 60, or 90 days later).
- Risk Level: Maximum for the seller.
- Best for: Established relationships with multi-national companies.
- CAUTION – New exporters are advised NOT to use this payment method
2. Managing “Open Account” Risk with ECGC
When a buyer demands credit (Open Account) and won’t provide an LC, professionals use Credit Insurance. In India, this is primarily handled by the ECGC (Export Credit Guarantee Corporation).
The Practical Example: The Onion Exporter Case
Imagine an exporter in Gujarat sending a large shipment of onions to a buyer in Dubai on a 60-day credit term (Open Account).
- The Policy: Before shipping, the exporter pays a small premium to ECGC to “insure” the shipment. ECGC reviews the Dubai buyer’s credit history and gives a “limit” (e.g., they will cover up to $50,000).
- The Incident: The shipment arrives, the buyer takes the onions, but 60 days later, the buyer’s business goes bankrupt or they disappear.
- The Claim: The exporter files a claim with ECGC.
- The Payout: After verification, ECGC compensates the exporter for a major percentage of the loss (usually 80% to 90%).
Why professionals use ECGC:
ECGC is Export Credit Guarantee Corp. of India. It verifies the genuineness of the importer / buyer and also offers a credit insurance if you are exporting on credit. One must pay the premium for the credit insurance. Visit ECGC at www.ecgc.in
- Confidence: It allows the exporter to offer competitive credit terms to buyers without betting their entire business on the buyer’s honesty.
- Bank Support: Banks are more likely to provide “Post-Shipment Finance” (loans against your invoice) if they know the shipment is insured by ECGC.
The “Safe” Framework for Every Deal
Professionals often follow this “Rule of Thumb” to stay safe:
- Step 1: Always try for an Advance Deposit (e.g., 30% Advance, 70% against Scanned Documents).
- Step 2: If the buyer insists on credit, check if they can open an Irrevocable Letter of Credit.
- Step 3: If you must give credit on an Open Account, never ship without an ECGC policy or similar credit insurance.