Deferred payment in international contracts: Risks & Handling

Deferred payment in international contracts is a form where the buyer accepts payment after a certain period of time before receiving a set of receipt documents. The D/A payment method offers flexibility; however, it carries potential risks for the parties involved. This article will detail the deferred payment method, risks, and preventive measures to ensure optimal customer benefits.

What is deferred payment (D/A)?

D/A payment method (Documents against Acceptance) is a payment method in which the seller (exporter) delivers a set of documents to the buyer (importer) after the buyer accepts payment. This acceptance of payment is usually expressed by signing a promissory note. Accordingly, the buyer commits to pay for the goods on a specific date in the future. The bank acts as an intermediary in collecting money and delivering documents.

Advantages and disadvantages of deferred payment in international contracts

Deferred payment methods, especially D/A, create unique opportunities and challenges in international transactions. Understanding the pros and cons helps parties make appropriate transaction decisions.

Advantage

For sellers:

• Ensure documents are only delivered to buyers once they have accepted payment.
• Lawsuits can be filed against the buyer if they fail to pay the draft.
• A representative can be appointed in the buyer’s country to resolve any arising issues.

For buyers:

• You can inspect the goods before deciding to pay.
• There is time to arrange finances before paying.

For banks:

• Banks derive profits from related activities.
• Expand credit relationships with other banks.

Disadvantages

• High risk for the seller due to dependence on the goodwill of the buyer.
• The buyer may refuse to pay or become insolvent.
• The bank only acts as an intermediary and is not responsible for payment.
• Payment time may be prolonged due to the impact of objective factors.

D/A deferred payment process

The D/A payment process includes the following steps:

• Step 1: Both parties sign an international sales contract, which clearly stipulates the payment method as D/A.
• Step 2: The seller delivers the goods to the buyer but has not yet delivered the documents.
• Step 3: The seller prepares a set of payment documents and collection instructions and sends them to his bank (the bank transferring the documents).
• Step 4: The transferring bank sends the documents and collection instructions to the buyer’s bank.
• Step 5: The presenting bank notifies the buyer of receipt of the documents and requests acceptance of payment.
• Step 6: The buyer accepts payment of the promissory note and receives a set of documents to complete goods receipt procedures.
• Step 7: The buyer’s bank notifies the seller’s bank that the buyer has accepted payment.
• Step 8: When payment is due, the buyer pays the buyer’s bank.
• Step 9: The buyer’s bank transfers money to the seller’s bank and the bank transfers money to the seller.

Risks when using deferred payment methods and how to avoid them

Using the D/A method in international payments means facing many potential risks. Identification and preventive measures are prerequisites. The following are specific risks and prevention measures:

Risks for the seller

• The biggest risk is that the buyer does not pay on time or becomes insolvent.
• Collecting banks can make mistakes, leading to disputes and financial losses.
• Payment acceptance signatures may be forged or have no legal value.
• The goods lose control after the importer accepts the bill of exchange.

Prevention measures:

• Carefully evaluate partners and only use the D/A method with reputable partners with long-term business relationships.
• Request a payment guarantee from a reputable bank or financial institution.
• Carefully check the signature and authority of the person accepting payment.
• Purchase export credit insurance to protect against non-payment risk.

Risk to the buyer

• Documents can be falsified, leading to receipt of goods not in accordance with the contract.
• Exchange rate risk and political instability can affect liquidity.
• After accepting payment of the promissory note, if the importer fails to pay the exporter on time, he or she may be sued by the exporter.

Prevention measures:

• Carefully check the documents and goods before accepting payment.
• Use an independent goods inspection service.
• Negotiate flexible payment terms, allowing for exchange rate adjustments.

Risks for banks

• The collecting bank bears the risk if it transfers money before the importer accepts payment.
• The collecting bank bears the risk if it does not receive money from the collecting bank.

Prevention measures:

• Establish strict risk control processes.
• Make sure you have all the necessary information and documents before making the transaction.
• Use a secure electronic payment system.

Questions related to deferred payment in international contracts

What types of goods are suitable for the D/A deferred payment method?

D/A payment method is suitable for goods with price stability, not affected by market fluctuations, and with long storage periods. These items can include machinery, equipment, construction materials, and high-value consumer goods.

If the buyer is late in payment, what will the seller do?

In case the buyer delays payment, the seller has the right to request the bank to notify the buyer of the breach of contract. If the buyer still does not pay, the seller can take legal action to collect the debt.

Why is it necessary to carefully check partners and goods before deciding to pay?

Thoroughly evaluating partners and goods before deciding to pay is extremely important to ensure transaction safety. This will help buyers minimize the risk of receiving fake or poor quality goods and avoid being scammed.

What types of insurance can mitigate risks in D/A payments?

Export credit insurance protects sellers against non-payment risks, while cargo insurance covers potential losses or damages to goods during transit.

Are there regional variations in D/A procedures?

Yes, D/A procedures can differ slightly across countries due to variations in banking practices, legal frameworks, and trade regulations.

Effective deferred payment consulting service in international contracts

Long Phan Consulting Company provides professional consulting services on D/A deferred payments, helping businesses minimize risks and optimize benefits. Our Services include:

1. Consulting on the advantages and disadvantages of D/A payment to consider options;
2. Consulting and assessing risks in each specific transaction related to D/A payment;
3. Consulting on the most optimal measures to avoid risks;
4. Draft and review contracts, including D/A clauses;
5. Consulting and supporting negotiations during the signing and implementation process and resolving arising issues;
6. Consulting solutions to ensure payment obligations;
7. Consulting on effective dispute resolution options (if any);
8. Consulting and answering other issues related to D/A payment.

D/A payment method brings many benefits, but also has many potential risks. To ensure safety and effectiveness, customers should carefully learn about this method and choose a trustworthy partner. If you need further advice on D/A payment methods or other issues related to international trade contracts, please contact Long Phan Consulting Company via the hotline: 0906735386 for support.