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Tips to Maximise International Payment Flexibility as an Exporter
When businesses decide to expand and venture into the international markets through trading, they have to consider several things. Businesses have to analyse the feasibility of export in terms of the company’s growth and set up the right system to manage exports. Moreover, they need to understand international laws and duties. Additionally, they have to learn the payments effectively. These questions are some of the most basic and important aspects to ponder.
As with all sales, the key to exporting is to ensure a proper payment system that gets you the payments in full and on time. Exporters need to answer the question of payment early on since it is an essential aspect of international trade. However, given the complicated nature of international trade, it can get a bit tricky. There are several payment terms or methods of payment that you can opt for.
The payment method you chose plays a role in determining the attractiveness of your offer. Moreover, it can also affect the convenience, financial safety and security of the foreign customer. When you are selling products or services to a global audience, you need to make your payment options flexible and accessible to everyone without losing out on security and minimizing the risks involved.
Currently, there are three proven tools that most well-established and reputed exporters use to streamline their international transactions. They are escrow services, documentary collections, and letters of credit.
1. Escrow Services
Escrow service is a great option for international transactions. It especially works as a guarantee when dealing with buyers who provide a higher risk of non-payment. This method involves cash in advance option where you and the buyer bring in a third party to collect, hold and disburse the funds at the decided time. You can open an escrow account with any of the platforms that provide the services by paying an escrow account fee. It reduces the risk of being scammed and ensures that both the parties involved meet the terms of agreement for sale. We at Tazapay offer digital escrow services at a 1.8% escrow account fee of the transaction value and no other hidden payments involved.
2. Documentary Collections
International banking rules govern documentary collections, and it is slightly lighter on your pockets. However, the trade-off is that the protection for sellers against buyers is lower. It would help if you only took up DCs with buyers that have good credit. Under DC, you agree to ship under a transport document, and the funds are released once the buyer gets this document and is ensured that the package will reach him/ her. Once the buyer accepts the document, it is sent from your bank to the buyer’s bank, and the foreign bank releases the funds into your account. However, an important point to note here is that your bank might facilitate the transaction, but it does not guarantee it.
3. Letters of Credit
Letters of credit offer you a quick and trustworthy method of guaranteed payment. They are based on a set of international rules that govern both the buyer’s and seller’s banks that have been in use for years now. While LCs are inexpensive, there is the cost involved, and you require expertise in executing them without any mistakes. The best part about LCs is that they can be used for transactions ranging from a few dollars to billion-dollar deals.
Types of Documentary Credit: A Guide
A documentary letter of credit is a type of written undertaking issued by a bank to the beneficiary (the seller) on the instructions given by the applicant (the buyer) to pay the decided amount of money at a pre-decided future date or at sight. Moreover, there are several types of Documentary letter of credits. Hence, it is crucial to understand the differences to maximise advantage and utilise them under the right circumstances. The most common types of documentary letter of credits and potential risks are covered here
Types of Documentary Credit
It is an undertaking that guarantees the bank’s issued payment for any services or goods purchased. To add on, it is non-cancellable during a specified period. Any cancellation or amendment of the documentary credit can only be made when the beneficiary has agreed. A credit, by default, is irrevocable. Revocable credits, however, are the ones that can be cancelled without the beneficiary’s consent at any time and do not offer any adequate security. Typically, banks do not authorize a revocable credit.
2. Silent Confirmation
It is the private arrangement between the seller and the bank in which the bank adds a guarantee of payment to the seller without the issuing bank’s knowledge on certain set conditions. It is an advising bank’s commitment to pay or accept with silent confirmation. Contrary to the confirmed letter of credit, it involves no confirmation instruction by the issuing bank. Therefore, these are pure agreements between the ‘silently confirming’ bank and the beneficiary.
3. Confirmed
Confirmation refers to a definite undertaking by the confirming and issuing bank for honouring or negotiating a complying representation. It is a pre-condition included in the sale contract and requested by the seller at the time of agreeing to the sale of goods or services. The seller usually request this under the following circumstances:
- Documentary risk
- Country risk
- The risk of issuing bank
4. Red & Green Clause
These credits include an exclusive clause, allowing the seller to draw the credit before the goods are shipped and the document submitted. If we go by history, this clause gets its name by the way it was written, i.e., red or green ink.
- Clean or Unsecured Red Clause: Doesn’t require any proof of goods.
- Documentary Or Secured Red Clause: It includes advances made against bestowal of warehouse receipts or other similar types of documents along with the seller’s undertaking of delivering the bill of lading and other documents.
- Green Clause: Advance payment is allowed but offers storing of the goods on the bank’s behalf as security.
5. Revolving
A credit covering multiple transactions over a long period is called a revolving letter of credit. If you wish to increase the value of a partially or fully utilized credit, an amendment is generally required. However, a useful and better way of utilizing the same is through a revolving credit. It can reduce the administrative workload often associated with repetitive purchases of goods of the same type from the same supplier regularly. The credit might revolve in relation to time and will be either cumulative (carrying forward of any sum not utilized during one month) or non-cumulative (an explicit shipment each month). It can also revolve in relation to value.
6. Transferable
Under this credit, the seller can transfer the credit in full or partial to one or more third parties. It is essential for the credit to state that it is transferable for such practice to be fully effective. All the transfers must be made along with similar terms and conditions of the credit. The only exceptions are:
- The credit amount
- The expiry date
- Any unit price stated therein
- The period for presentation, or
- The latest shipment date or given period for shipment
7. Standby Letter of Credit
It is similar to demand guarantees which are also known as bank guarantees. It is a legal document that guarantees payment to the seller even when the bank or bank’s client defaults on the agreement. Contrary to the normal documentary credit, it offers security against non-performance. In other words, the seller can claim if an unexpected action, as covered by the standby, doesn’t take place.
8. Back-to-Back
Traders who intermediate between the final buyer and the source supplier usually utilized this type of credit. It involves issuing two different credits:
- A Master Credit favours the ‘middleman’, while,
- A Back-to-Back Credit favours the source supplier.
The terms and conditions of both are similar except for certain things such as the presentation period, the credit amount, the latest shipment date, the expiry date etc.
While the letter of credit might be compelling, considering the risks involved, it is safer to go with trusted and reliable options such as Escrow. Tazapay is a trusted third-party platform that holds the money until both the seller and the buyer meet all the obligations.
4 Things to Know About CFR Shipping
In international commerce, certain trading terms work as legal contracts between the buyer and seller, specifying the roles and responsibilities of both parties. Cost and Freight, CFR, is one such trading term, also referred to as incoterm, which clearly defines when the ownership, risk, and cost of the product transfers from the seller to the buyer. Let us understand the cost and freight (CFR) incoterm meaning in detail. In this contract, the seller is required to make arrangements for the carriage and pay for it until it reaches the nominated destination. However, once the shipment is loaded at the destination, the buyer bears the risk of any loss or damage.
Here are four important facts you must know about CFR shipping:
1. Know who pays the freight in CFR shipping
In this type of trading contract, the responsibility is on the seller to cater to all the freight charges. He has to transport goods to the buyer’s destination. Besides, the seller must provide all the necessary documentation regarding the pick up of the shipment to the buyer. So when it comes to paying for shipment transportation, the shipping party has more responsibility under CFR shipping as the seller fully bears the freight cost.
2. Know who handles custom clearance
As per the CFR shipping term, all export custom proceedings need to be taken care of by the seller. The seller manages relevant documents related to export like the bill of lading, commercial invoice, and packing list. Additionally, the seller is also responsible for making payments such as freight forwarding and terminal fees. Once the customs clearance procedure is completed, the seller then hands over all the documents to the buyer.
3. Understand how CFR is calculated
It is important to calculate the cost of shipping goods accurately. Factors such as custom fees, duties, taxes, insurance charges, and documentation must be taken into account when calculating the price of CFR. For calculation, one must know about the shipping term FOB, ‘free on board’, commonly referred to as ‘freight on board’. It is an indicator of the period when the responsibility and ownership of goods end on the seller. The CFR can be calculated using the below formula:
CFR Price = FOB Price + Shipping
4. Know incoterms that are similar to CFR
Now that you know the CFR shipping term meaning, you must also know about other incoterms closely related to CFR. One other incoterm is the cost insurance and freight (CIF). In this case, the seller arranges for the carriage of goods to the destination port and has an additional obligation of insuring all the goods until they reach the port. As per the free alongside ship (FAS) incoterm, the seller is responsible for only delivering the cargo to the port, and after that, the responsibility shifts completely to the buyer.
Cost and Freight undoubtedly play a crucial role in international commerce. If you are a seller involved in cross-border trade, make sure you know everything about CFR before choosing it. You must also carefully select a reliable payment platform like Tazapay to ensure safe cross-border transactions at all times.
Tazapay in Association with Standard Chartered Offers Digital Escrow on Proxtera Network
Singapore’s latest financial partnership to enable smooth cross-border trade was between Proxtera, Tazapay and Standard Chartered to support the Business sans Borders initiative. A transaction of many firsts – it was Standard Chartered’s first step to enter the Escrow as a Service (EaaS) offering and Tazapay’s first banking partnership. With stalwarts of the financial industry such as Standard Chartered partnering with Tazapay to support Proxtera’s vision, the SMEs will see a revolutionized, digitized & secure system for cross-border trade.
First, let us understand how escrow works? Basic questions that cross one’s mind about escrow payments – How much is the escrow fee? What is the meaning of escrow payment? How does it benefit the parties involved, and so on?
Tazapay’s escrow services offer security to both the buyer and the seller by acting as the protector of funds. An Escrow payment service is a tripartite agreement between the buyer, seller, and the third party that is mutually chosen. This third party holds the funds and disburses them only once the obligation of the agreement has been fulfilled by both parties involved. Evidence of delivery of goods or a receipt of the services and goods rendered acts as proof that the obligation has been fulfilled, and then funds are transferred. Tazapay offers a 1.8% processing fee to carry out the transaction, which is capped at a reasonable amount, regardless of the transaction value.
A little while back, Proxtera Protect powered by Tazapay was launched to enable seamless cross-border trade and payment transfers. While Proxtera is responsible for bringing together buyers and sellers on its single marketplace platform, Tazapay ensures secure payments and digital background checks, thereby providing an enterprise with a holistic offering and bringing down the dependency on multiple service providers. Proxtera is a marketplace that connects parties based on their requirements and services offered. However, it was unable to offer financial transaction security which is a critical requirement in cross-border transfers. Tazapay capitalized on this gap through its secure Escrow service offering. Standard Chartered has further strengthened this unison in its endeavour to offer Escrow-as-a-Service & bring Singapore’s vision of frictionless cross-border trade to life, especially for SMEs.
Standard Chartered’s role will involve the facilitation of setting up bank accounts that Tazapay requires to receive and hold funds in any location and enabling the transfer of funds to the seller once the escrow conditions have been fulfilled as validated by Tazapay.
Standard Chartered’s take on this collaboration was the democratization of EaaS, building commercial trust amongst partners doing business on the Proxtera network. It will strengthen their aim of sustainable development for Small and Medium Enterprises as Digital escrow will be more accepted and trusted to settle transactions globally. SMEs drive economic growth and are the backbone of any economy. With a little hand-holding, they can maximize their true potential and become forces to reckon with.
Since its inception, Tazapay has been committed to making international trade and cross-border payments easy for SMEs. This partnership has moved them one step closer towards this goal. The partnership will also further enhance the security and ease of holding and transferring funds, regardless of the location.
Proxtera can capitalize on the network of Standard Chartered bank to broaden its partner network and facilitate seamless cross-border trade over a larger area.
This unison has multiple benefits – from providing a wider network of trading partners, to the digitization of B2B payments, enhanced business growth, secure and safe financial transactions and no location restrictions. We see this as an all-encompassing opportunity for anyone interested in cross border trade.
Benefits of Escrow for Small Businesses
Escrow is a payment service that is a tripartite agreement between the buyer, the seller, and the escrow provider that is beneficial for both the buyer and the seller involved in a transaction. The process involves keeping funds with a trusted and neutral third party responsible for releasing funds when the contractual obligations are fulfilled by both parties involved. A trusted escrow provider like Tazapay eliminates the risk for both the seller and the buyer.
What are the benefits of Escrow for small businesses?
Escrow accounts are particularly beneficial for small businesses to secure transactions that involve huge sums of money. For transactions that involve professional services, cross-border trade, procurement, supply chain, etc., small businesses can leverage the benefits of escrow payment providers to mitigate payment risks and grow seamlessly. They are backed by state-of-the-art security, keeping the funds safe and help two parties to transact securely and stress-free. Escrow account costs are reasonable and should be viewed as investments because small businesses can reap multiple benefits.
Benefit for the buyer
If a business is on the buying side, one can be assured that their money will be released only after the seller has fulfilled its side of the obligation like shipping the items etc. The buyer is further protected against any delays as the money is only released following the delivery timelines set in the escrow agreement that both parties mutually finalize. In case the received goods fail the inspection, the buyer’s money stays protected.
Benefit for the seller
Suppose the business is on the selling side. In that case, the seller can be secure about the intent and ability of the buyer to pay as the buyer funds the escrow account before the seller releases the items. Tazapay’s escrow service ensures that the seller only does business with buyers, verified by Tazapay, to avoid any post-shipment hassles. Moreover, Tazapay also provides a guarantee for each transaction, which is hugely beneficial to small businesses since they do not have huge working capital and cannot afford delayed payments.
Business verification and vetting
A few escrow service providers such as Tazapay offer online verification of the buyers and sellers involved in a transaction. The identity, compliance status, and detailed company reports are made readily available, which would otherwise cost a small business a lot of time, effort, and money. This KYC and identification process opens up new avenues for the seller to bring in more clients. It also enables buyers to deal with sellers while being secure as credentials are verified.
Mitigation of risks involved in cross border trade
International trade risks involved with cross-border trade payments such as payor risk, enforcement risk, and KYC risk are eliminated when using a trusted escrow service provider such as Tazapay.
Suitable for a range of goods and services
Escrow services are not limited to cross-border trade, it can be used across industry types and geographies. Be it jewellery, vehicles, mortgages, property transactions, or any type of service; an escrow account protects both parties regardless of the transaction value.
Ideal for fixed asset transactions
If one is investing in fixed assets such as a plant, machinery, vehicle, or other types of large investment, it is recommended that one uses an escrow service. Sizable transactions like purchasing equipment, white office goods, machinery require a large amount of cash and will have a longer processing time. These cash deposits are ideal for remaining protected in the escrow provider’s account until the transaction is finalized and comes through.
Dealing in real estate is a multifaceted process and involves copious amounts of time and money. Hence, small businesses should opt for an escrow service provider to better secure their transaction and ensure the fulfilment of the agreement.
Ensures safe and secure online transactions and transfers
Many small business owners choose escrow services to conduct online transactions and transfers, be it a high-value transaction or a small value transaction. If you have never met the person you are conducting business with, it is ideal for exercising caution and transacting securely and worry-free.
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Tips to Maximise International Payment Flexibility as an Exporter
When businesses decide to expand and venture into the international markets through trading, they have to consider several things. Businesses have to analyse the feasibility of export
Types of Documentary Credit: A Guide
A documentary letter of credit is a type of written undertaking issued by a bank to the beneficiary (the seller) on the instructions given by the applicant
4 Things to Know About CFR Shipping
In international commerce, certain trading terms work as legal contracts between the buyer and seller, specifying the roles and responsibilities of both parties. Cost and Freight, CFR,
Tazapay in Association with Standard Chartered Offers Digital Escrow on Proxtera Network
Singapore’s latest financial partnership to enable smooth cross-border trade was between Proxtera, Tazapay and Standard Chartered to support the Business sans Borders initiative. A transaction of many
Benefits of Escrow for Small Businesses
Escrow is a payment service that is a tripartite agreement between the buyer, the seller, and the escrow provider that is beneficial for both the buyer and
Tricks to Handle Cross-Border Business Payments as an SME in 2021
With the increase in technology and globalisation, international trade is witnessing rapid growth as well. This growth can be sustained and stay effective if accompanied by efficient
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