DEFINITIONS OF EXPORT REPAYMENT TERMS
Proceedings from most secure to least secure:
1. Cash or Cash in Advance - Seller receives cash in full from Buyer prior to shipment. Acceptable cash is U.S. dollars or marketable foreign exchange. For obvious reasons, foreign currency which cannot be readily converted into dollars (foreign exchange) would not be considered "cash" in this context.
2. Confirmed Irrevocable Letters of Credit (CILC) - Procedures are same as (3) with the exception that a U.S. bank "confirms" the LC, or, in other words, substitutes its own performance for that of the local foreign bank which issues the LC. Payments under a CILC are remitted immediately by the U.S. bank issuing its confirmations upon receipt of documents and LC. It should be noted that the Buyer pays all charges for opening the LC at its local foreign bank and the Seller pays all charges for confirming the LC. The U.S. Bank which confirms the LC assumes all credit, political and exchange risks of the foreign bank and its country.
3. Unconfirmed Irrevocable Letters of Credit (UILC) - Local foreign bank opens its letter of credit (irrevocable promise to pay once terms are met) to Seller on behalf of Buyer. Seller presents documents and LC to U.S. bank for collection. U.S. bank forwards to issuing foreign bank and payments are remitted in accordance with LC (sight to 180 days). Caution is taken to: 1.) make sure LC is irrevocable, and 2.) the LC does not call for special terms or conditions which cannot be met. The U.S. bank can provide assistance in this regard.
4. Cash Against Documents (CAD) - Buyer deposits cash with its local (foreign) bank. Seller presents documents to its U.S. bank for "collection". U.S. bank sends documents to foreign bank which remits payment back through U.S. bank and forwards documents to buyer.
5. Sight Draft/Documents Against Payment (SD/DP) - Same procedure as CAD (item 4) with the exception that a Draft accompanies the documents. The Buyer has made arrangements with its bank to repay the amounts due under the Draft. Until such arrangements are made the bank holds the Draft and the documents. SD/DP means the bank pays at "sight", i.e., upon presentation with the documents.
6. Sight Draft/Document Against Acceptance (SD/DA) - Also known as "Time Drafts" because a prescribed period of time elapses before payment; e.g., 30, 60, 90, 180 days SD/DA. The procedure is the same as SD/DP (item 5) except, in lieu of payment at sight, the bank returns the Draft stamped "Accepted" to the U.S. bank which presented it for collection on behalf of the Seller. When the prescribed time period elapses, the U.S. bank presents the Draft for payment and the local foreign bank honors its acceptance and remits payment.
7. Open Account (O/A) - This is the least secure means of foreign sales. In lieu of a bank being presented the documents, all of the documents are forwarded directly to the Buyer and payment is remitted according to the terms of the invoice. Net 30 to 180 days are the range of O/A terms. The flow of documents is all important because the bearer of documents is the only party who can clear the imported merchandise through customs. In O/A sales, the Buyer not only has immediate access to the merchandise, since it possesses the documents, but can control repayment at its discretion. For this reason, only the most creditworthy and longstanding customers should be afforded O/A terms.
8. Promissory Notes - Generally used for medium term (one to five year) sales of capital equipment or quasi-capital goods. A Promissory Note is a signed valid and enforceable obligation to pay a certain amount ("principal") plus interest by the "Maker" (or Buyer) to the "Payee" (or Seller). Payments are made in one, or a series, of, installments until the entire principal is repaid. Promissory Notes may also be guaranteed by a third party ("Guarantor") who is affiliated with the Maker. A Guarantor can be an individual (e.g. owner), parent company or financial institution. Rarely are promissory notes used for short term sales of non-capital goods.
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