Payment Terms Negotiation in International Trade

Payment Terms Negotiation in International Trade#

Payment spectrum from safest (for seller) to riskiest: cash in advance, LC at sight, LC with usance (time draft), documentary collection D/P, documentary collection D/A, open account with credit insurance, open account without insurance. Most B2B international trade occurs on open account (40-50%) followed by LC (20-25%). Your leverage determines where you negotiate on this spectrum.

Matching Payment Terms to Transaction Risk#

Low risk (established buyer, stable country, repeat business): open account 30-60 days. Medium risk (new buyer, moderate country risk): LC at sight or D/P. High risk (unknown buyer, high-risk country, large value): confirmed irrevocable LC. The cost of more secure terms (LC fees, insurance) should be weighed against the potential loss. A $5K LC fee on a $500K shipment is 1% insurance against total loss.

Early Payment Discount Economics#

Offering 2/10 net 60 (2% discount if paid within 10 days, otherwise full payment at 60 days) sounds small. But annualized: the buyer earns 14.6% annual return by paying early. If your cost of capital is 8%, this trade is expensive for you. Alternative: offer 1% discount for payment within 30 days — annualized return to buyer is 12.2%, cheaper for you, still attractive to buyer.

• Payment terms determine who bears risk and financing cost — negotiate from a position of knowledge, not habit