Foreign trade settlements

Foreign trade settlements: the way a company settles with foreign partners under a foreign trade contract. In everyday speech they are simply called foreign trade payments. They include:

• paying the supplier for imported goods;
• receiving proceeds from a foreign buyer;
• paying for services abroad: transport, storage, licenses, maintenance;
• advances, partial payments and returns of payments under the contract.

The parties choose the form of settlement in the contract. It determines who takes more risk: the buyer who has paid and is waiting for the goods, or the seller who has shipped and is waiting for the money.

Main forms

• Bank transfer using the details from the invoice: the most common option. With prepayment, the risk is on the buyer. On open account terms, the seller ships first and the buyer pays after receipt, and then it is the seller who bears the risk.
• Letter of credit. The buyer’s bank undertakes to pay the seller when the seller presents the shipping documents. Reliable for both sides, but more expensive and more complex to arrange.
• Collection. Banks release the shipping documents to the buyer against payment or acceptance of a bill. Cheaper than a letter of credit, but the bank does not undertake to pay.
• Escrow. The money is held by a third party until a condition is met.
• Clearing and set-off. Mutual claims are offset without transferring the full amount. In foreign trade, such settlements are limited by currency legislation.
• Payment through an agent. The agent pays the supplier in its own name on the company’s instructions.

Where the main difficulty lies today

For Russian companies, the question is often not whether to choose a letter of credit or a transfer, but whether the transfer will go through at all. Hence the spread of payments through agents. Delays are most often caused by three things: the payment purpose does not match the documents, there is an error in the bank details, or the route has stopped working. The first two are removed by checks before payment, the third by choosing the route for the specific payment.

Which documents are needed

The contract, the invoice or bill, and a specification if needed. For imports, the declaration and transport documents are added later. When paying through an agent, you also need the agency agreement, the payment order, the payment confirmation, the agent’s report and completion certificate. If a third party will make the payment, this is worth providing for in the contract in advance.

What makes up the cost

The agent’s or bank’s fee, the FX markup on conversion, correspondent bank fees, the cost of documents. Options are worth comparing by the full cost in roubles for the amount the supplier will receive.

VEDmost selects an agent and a route for each import payment and for receiving export payments. The rate and the fee are known in advance: for imports before the roubles are debited, for exports before the buyer pays. We put together the document package. Escrow is available on request: the roubles wait for execution in a special account at a Russian bank, for an additional fee. More on the Import payments and Receiving payment from buyers pages.