Prepayment
A commodity purchase and sale contract is based on the tripod: the commodity itself, the condition of delivery and payment terms. Payment terms are understood to mean currency, term and type.
While currency and term are negotiated conditions between buyer and seller, the payment method,as a rule, it is imposed by the seller.
This stems from the fact that the choice of the modality is almost always linked to the risks of non-payment, in particular, commercial and political risks.
Thus, the seller, after a careful cadastral evaluation made in relation to the buyer and his country, chooses the most appropriate form of payment, among others the remittance without withdrawal, the collection, a letter of credit (L / C) or an advance payment.
If the risk of non-payment has been the main reason for demanding early payment, modernly we observe that this modality has also been used in order to finance the production of the object goods of the sale. It is also justified in purchases made to order or, still, to obtain preference in the supply.
Prepayment is great for the supplier: it eliminates the risk of non-payment and still provides capital for production of the goods to be exported.
However, it imposes a financial cost on the importer / buyer. And more. The importer runs the risk of not receiving themerchandise and not even get your money back.
That said, in the case of an unknown supplier and the use of another modality not being possible, it is essential that guarantees are required from this supplier to ensure that the buyer returns any advance that may be made.
Such guarantees, therefore, must be provided prior to shipment to the exporter. The guarantee – Advance Payment Bond -, which can be constituted in the form of a Standby Letter of Credit (a Standby Advance), can ensure not only the return of the capital sent, but also the payment of a fine non-performance, as well as interest on capital use by the exporter.
The Export Insurance can be a good solution for the exporter, who for his guarantee can choose the Export Insurance, where Export Insurance companies guarantee payment to the Exporter in the case of non-payment or default by the Importer.
This type of insurance works worldwide and is a modality that greatly facilitates transactions Foreign Trade.