Payment Options

What Banks Can Do

Virtually all direct transactions between Canada and other countries are handled by Canadian chartered banks on behalf of their customers. The major banks have international banking divisions and offer a wide range of specialized services such as financing and investment, advisory services on market conditions, and more. Furthermore, through direct or indirect representation in the principal money market centres abroad, the banks are equipped to deal in foreign exchange, accept deposits and make loans in foreign countries.

Methods of Payment

Most export sales agreements stipulate, in some manner, that certain collection documents must be submitted in advance by the exporter to the buyer or its bank in order to generate payment once the goods have been received. The main documents include commercial invoices (the exporter's bill of sale), consular invoices (required by some foreign countries), certificates of origin (attesting to the origin of the exported goods), import licences (some countries require importers to obtain these), inspection certificates (health or sanitary certificates are required by many countries for animals, animal products, plants, and other agricultural products), and dock and insurance receipts.

The main methods of payment are:

• Letter of Credit - a legal document to arrange payment between an importer and exporter. It acts as security for both parties, giving the exporter confidence that the importer is able to pay for the goods while assuring the importer that payment will be made to the exporter only after the terms outlined in the letter of credit have been met.

Once the letter of credit has been drawn up and the application is accepted, the importer instructs the bank to transfer the payment to the exporter. The importer's bank passes this information to the exporter's bank, who then notifies the exporter that payment has been arranged. The exporter sends out the goods and later presents the required invoices and shipping documents to the bank in order to receive payment. There is no risk involved with the exporter receiving payment as long as the terms of the agreement have been followed.

The letter of credit ensures that:

• Payment to the exporter will only be made after the terms of the agreement have been met.
• The documents, which have been reviewed by the bank's experienced staff, are in order.
• The exporter is assured of the importer's ability to pay and, as a result, a better price and more advantageous terms of payment may be offered.

Alternatives to the Letter of Credit

• Cash in Advance - an uncommon method of payment. However, a foreign buyer may pay cash in advance for a custom order. Most often, there will be a down-payment stipulated upon signing the contract and a subsequent payment made upon delivery.

• Open Account - the exporter ships the goods as soon as the order is received and then invoices the purchaser for payment within a certain amount of time (i.e. 30 days). Although common for domestic transactions, it is very risky for export ventures. However, the risk can be negated using the credit insurance program through the Export Development Corporation.

• Documentary Collections - the exporter issues a bill of exchange which is an unconditional request for payment on demand or at a specified time and other documents which transfer ownership to the buyer. The exporter instructs their bank to transfer ownership upon full payment. The banks, in this case, act as intermediaries. If payment is not made the document of title, usually the Bill of Lading, is held by the foreign buyer's bank until instructions for payment by the buyer are provided. This is riskier than the Letter of Credit as the banks will not guarantee a bill of exchange. Therefore, the exporter assumes responsibility for the shipment and risks non-payment.

• Consignment - the exporter ships the goods but retains ownership of them until they are sold. It is risky for the exporter as they incur all the expense and risk and must manage the goods at a distance. However, it can be beneficial if the market is slow. It can also be used to your advantage if you are dealing with realiable customers.