Open a/c is a system of payment based upon trust between buyer (importer) and seller (exporter). It usually encompasses a period of credit. Its applicability is often dependent on availability of credit information. Custom and practice also plays a role in determining its use.
It gives a comparative advantage to the importer & disadvantage to the exporter in terms of cashflow.
There is a risk that the seller will not receive payment or that payment will be delayed.
Documentary Collection
Documentary Collection is a more secure system of payment based upon a set of internationally agreed rules (URC 522), but it does not confer a guarantee of payment for goods despatched.
It may secure documentary access to the goods shipped and, in that respect, it has advantages for the exporter. The importer has the advantage of not making payment arrangements until he requires access to the goods.
There is a risk that the importer may refuse the goods after shipment.
Letter of Credit (LC)
A Letter of Credit (aka Documentary Credit) is the most secure arrangement for international payment, apart from prepayment. The security of payment is guaranteed by a bank and is conditional upon compliance with the terms and conditions of the LC and strict adherence to the rules governing the transaction. The current rules (UCP 600) have been in force since 2007, but do not supersede previous versions of the rules.
It is attractive to both the exporter and the importer in that it only guarantees payment based upon documentary compliance with the LC.
The risk for the exporter is that non-compliance with the terms of the LC removes the guarantee of payment. The risk for the importer is that payment is based solely upon documentary evidence of despatch and quality of the goods.
The Outsourcing Option
Where payment to the exporter depends upon absolute compliance with the terms of the LC, it is essential that the requisite expertise is applied to the management of the LC process. If this level of expertise is not available in-house, the obvious alternative is to outsource this aspect to a qualified expert in the field.
The Outsourcing Option versus traditional LC management
EXPORT BUREAUX OUTSOURCING SERVICE
Cost
Only pay a cost per LC, using the most experienced LC expert in Ireland, who also has extensive first-hand experience of imports and exports. These fixed costs help set reliable budgets for export markets.
We can provide training as and when needed, from beginner to the most advanced. Training is provided by the only Irish member of the UCP Consulting Group which worked on the revision of the UCP (current rules governing LC’s worldwide).
Risk Mitigation
Our LC expertise is unrivalled in Ireland and gives you the best option to analyse comparative risk on a case by case basis. Our experience covers many industries and all areas of the world.
Efficiency
We can cover as much or as little of your LC business as you consider offers the most efficient utilisation of resources. When we cover for maternity, peaks or holidays, this improves your payment turnround, decreasing debtor days.
Appropriate Payment Terms for Export Markets
We can apply extensive expertise to offer the best advice in setting and reviewing payment terms worldwide.
TRADITIONAL HANDLING OF LC BY EXPORTER
Cost
(a) Employ someone experienced in handling LC’s, paying full year’s salary, employers tax costs, pensions etc, office space, lighting, heating. This option should only be considered if there is sufficient volume of LC traffic.
(b) If the volume of LC traffic does not warrant employing someone on a full time basis, train a member of staff to handle this on an ad hoc basis, but the fewer the number of transactions, the greater the risk of errors in assessing the LC and handling them.
Risk Mitigation
From an exporter’s viewpoint, the main advantage of LC’s is the comparative security of payment offered. This security is dependent on an expert assessment of each LC, BEFORE despatch of goods and in some industries, before production.
Efficiency
Most businesses have difficulty with peaks and troughs. If you employ someone on a full time basis, this means that you pay them when there is little or no work at times. It also means that they fall behind at peak times, or it costs extra for overtime. What about holiday cover ?
Appropriate Payment Terms for Export Markets
Do you have the in-house expertise to determine the appropriate payment terms for each market/ each customer ?
Documentary Collection
Letter of Credit (LC)