In international trade, one of the most contentious times during contract negotiations occurs when trying to determine the method of payment, especially when dealing with new trading partners. Sellers obviously want to minimize their risk and ask for payment up front. Buyers want to do the same and ask for payment after their product arrives. No matter what option is chosen, one party has to place more trust than one would like in the other.
 
While we'd like to think the world is full of decent, honest people, you never know if the used car you're importing with the minor weather damage actually has seen one too many hurricanes or if a customer's payment will mysteriously get "lost in the mail." To prevent these headaches, your company should implement some risk-minimizing strategies until a relationship is formed between your two companies.
 
A common risk-minimizing strategy is to buy small quantities of goods, thereby lessening the financial impact on the buyer. The philosophy behind this is it is better to lose $1,000 than $5,000. Negotiating a partial pre-payment with the balance on proof of shipment, usually evidenced by transport documents, is also a good strategy. The split between prepayment and balance payable on shipment is usually negotiated between seller and buyer.
 
What if, however, the sale is a one time deal, but the item in question is of high value? For example, let's consider the sale of a second-hand passenger bus. Assume that the bus is being sold for $15,000. The seller is insisting on prepayment and the buyer is, understandably, hesitant. Should the buyer make the payment, and if he does how can the buyer's risk be minimized?
 
One option is to travel to the country of sale, ensure the goods meet your expectations, and then make the payment. This, however, would be an extremely expensive exercise and difficult to achieve. To minimize the cost, you could appoint an independent inspection agency to undertake a pre-shipment inspection of the goods. The buyer, therefore, links the prepayment to the results of the inspection. The buyer then can send payment only when a "clean report of findings" is issued by the inspection agency. This way, at least, the buyer knows that the goods conform to the contract.
 
Care should be taken when instructing the pre-shipment inspection agency, however, because they will carry out the inspection only in accordance with the instructions you send them. If the buyer is seeking a detailed report on the condition of the bus, for example, it may be necessary for the bus to be tested to ensure that it is in good enough condition to be driven on the road. This may require the inspection company to seek appropriate experts to provide their report. It can be done, but the costs will obviously increase. The costs and risks of pre-shipment inspection are borne by the buyer since the seller, obviously, has no interest in having their goods inspected.
 
Buyers also need to be wary of the delivery terms—the Incoterms 2000 (which will be superseded by the Incoterms 2010, effective from 1 January 2011) used in the contract. In a prepayment situation, it is strongly advised that the buyer does not agree to EXW terms because these terms are extraordinarily onerous on the buyer. EXW requires the buyer, at their own risk and cost, to undertake export customs clearance and enter into contracts of carriage and insurance. Given that the buyer may not be familiar with foreign customs processes (especially in the early stages of trade) and may not have established relationships with service providers, buying on EXW terms may produce some unpleasant surprises, including taxation ramifications. For example, in some countries the importer of record may become subject to being taxed on their worldwide earnings. It is therefore recommended that the C terms (CFR and CIF for traditional non-container sea traffic or CPT and CIP for multimodal transport) be used instead.
 
No matter what risk-minimizing strategy your company goes with, having one can help prevent unnecessary losses to your company and make the international trade process a little easier to handle. ( linda )05 Jan,2012

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