EXPORTER INCURS HIGH COSTS CHASING PAYMENT FOR GOODS SHIPPED!!!!!

An exporter recently approached AIB Trade Finance Services with a common problem. The company was spending a lot of time chasing their debtors for payment. The Financial Director complained that despite having delivered their goods to the buyer, they were incurring considerable expense in staff time and communication costs in order to chase their money.

The exporter had agreed to sell on an open account basis (see glossary) and was sending the shipping documents directly to the buyer to enable them to take possession of the goods prior to receiving payment. This meant that once the shipment had been made there was no control over when payment would be received.

Despite the buyer's agreement to pay at the end of the month following the invoice date, the exporter found that payment was actually received 30 to 60 days later. In addition the time spent chasing the payment was creating additional costs as well as increasing the time spent on the account by the credit control function.

CAN THE EXPORTER REGAIN CONTROL?

AIB Trade Finance Services advised the company to consider using a Documentary Collection to obtain payment, or a commitment to pay from the buyer. This meant the exporter was encouraged to send their shipping documents to the buyer through the banking system accompanied by a Bill of Exchange* drawn on the buyer with a payment date at the end of the month following the date of shipment.

The exporter instructed AIB Trade Finance Services, who in turn instructed the buyer's bank, to only release the shipping documents to the buyer against their acceptance of the Bill of Exchange and their agreement to make the payment on the due date. In addition AIB Trade Finance Services was able to instruct the buyer's bank to hold the accepted Bill of Exchange and present it to the buyer for payment on the due date.

THE BENEFITS FOR EXPORTERS WHEN USING DOCUMENTARY COLLECTIONS.

The use of a Documentary Collection gives an exporter greater control over their goods and when they get paid.

• The exporter can use the banking system to obtain the buyers commitment to pay.
• The exporter can also use the banking system to collect the debt.
• The exporter can retain control over their shipping documents until the buyer has paid or agreed to pay.
• Documentary Collections are a relatively inexpensive payment mechanism.

For further protection and control the exporter could have requested that the buyer's bank guarantee the buyer's commitment to pay. This provides additional benefits as follows:

• Gives greater security as the buyer's bank has added its guarantee that the Bill of Exchange will be paid at maturity.
• It eliminates the risk of non-payment in the event of the buyer having difficulties.
• It also provides an opportunity to obtain finance through non-recourse Bill discounting.

Conclusion

Exporters that transact business on an open account basis can often incur high costs in chasing payments. In addition, they usually lose control over their goods. Whilst this is an acceptable trading option for well known and financially secure customers in developed economies, it may not be appropriate for customers with weaker financial positions or located in less developed economies. The Documentary Collection can provide some additional security for the exporter whilst ensuring that the payment process is not unduly expensive or complex.

For further information on documentary collections visit our Diagrams and Product/Services section on this website.

* See our section on Bills of Exchange on this website.

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