International Trade Invoicing and Payment Methods
Pro Forma vs. Commercial Invoices
A pro forma invoice is a sales document issued by the seller (exporter) before goods are delivered. It has no fiscal value and does not require payment; it serves as a quotation for customs declarations or import licenses. Conversely, a commercial invoice is a legal document issued after shipment that requests payment. It includes party details, goods description, quantity, unit price, total price (including VAT), and transport/payment terms.
E-Invoicing Benefits
E-invoicing streamlines the billing process. Instead of manual data entry and physical mailing, sellers submit invoices via cloud-based software. Key advantages include:
- Efficiency: Automatic data updates for the buyer.
- Accessibility: Easy tracking and viewing from any location.
- Cost and Time Savings: Reduced administrative overhead.
- Security: Secure server storage.
- Payment Integration: Simplified automated transfers.
Payment in Advance Terms
Payment in advance (cash in advance) requires the buyer to pay before goods are consigned. This is common for new customers, those with poor credit, or buyers in countries with financial instability.
- CWO (Cash With Order): Payment is remitted when the order is placed.
- COD (Cash On Delivery): Payment is settled upon receipt of goods.
Open Account and Down Payments
Open account terms are the opposite of advance payment; the importer pays on a quarterly basis (e.g., 30, 60, 90, or 120 days after the invoice date). This is the safest method for importers. A down payment occurs when the importer pays a portion of the total cost upfront, with the remainder settled later.
Bank Transfers and International Codes
A bank transfer is the most common and fastest payment method. To identify a specific account, an IBAN (International Bank Account Number) is used, consisting of 27 alphanumeric characters:
- Country code
- Check digits
- Bank identifier
- Branch identifier
- Bank account number
For countries not using IBAN (e.g., the USA), a SWIFT code (also known as BIC) is required to identify the bank. For euro transfers within Europe, the SEPA (Single Euro Payments Area) system is used.
Bills of Exchange (B/E)
A Bill of Exchange (B/E), or draft, is a written order from a seller to a buyer requesting payment at a specified time. If payable immediately, it is a sight bill; if payable after a set period, it is a term bill. B/Es are negotiable and help manage exchange rate risks.
Documentary Collection (CAD)
In Cash Against Documents (CAD) or Documentary Collection (D/C), the exporter sends shipping documents to their bank, which forwards them to the importer’s bank. The importer must pay or accept the draft to collect the goods. Banks act as intermediaries but do not guarantee contract compliance.
Types of Documentary Collection
- Documents Against Payment (D/P): Issued “at sight”; the importer pays to receive documents.
- Documents Against Acceptance (D/A): Issued “at a future date”; the importer receives documents upon agreeing to pay on a future due date.
Letters of Credit (L/C)
A Letter of Credit (L/C) is a bank’s guarantee of payment once shipping documents are verified. The process involves:
- The importer (applicant) asks their bank (issuing bank) to open credit for the exporter (beneficiary).
- The issuing bank sends the L/C to the exporter’s bank (advising bank).
- The advising bank notifies the exporter of the payment conditions.
- The exporter ships goods and presents documents to the advising bank.
- The advising bank verifies the documents and forwards them to the issuing bank.
- The issuing bank performs a final check and debits the importer’s account to pay the exporter.
- The importer receives the documents to collect the goods.
Letters of Credit can be irrevocable (cannot be modified without consent) or confirmed (the advising bank guarantees payment if the issuing bank defaults).