How to protect your business when exporting overseas

This is highlighted by Singapore’s $1.2 trillion worth of total trade merchandise in 2021. Out of this figure, $614 billion comes from exports which means we have a positive trade balance.

Given the nature of the import-export business, competition can come from across the globe. As a result, companies operating in this environment need to consider convenient payment terms for their customers. However, while doing so, one must also balance and mitigate the different risks in export transactions.

Providing convenient payment terms to overseas-based customers

Payment terms that are best for the exporting company are usually the least beneficial for the importing company. For example, if you require your overseas customers to pay cash in advance before shipping out your products, they will be shouldering most of the risk. On the other hand, if you offer cash on delivery terms, you (as the exporting company) are carrying the bulk of the risk.

While trust is a very important aspect of any business transaction, and even more vital for longer-term business relationships, both parties have to weigh the risks they are exposed to. This is especially relevant for import-export businesses as the amounts involved are usually substantial and it can be a complex affair. Moreover, there could be external factors that may contribute to a breakdown in the deal.

As such, using trade financing solutions can provide a win-win solution as it evens out the risks that both parties have to shoulder. There are two main types of trade financing solutions for exporters: Export Letter of Credit (LC) and Export Documentary Collection.

1. Export Letter of Credit

   When you export goods to your overseas customers, you can use an Export Letter of Credit (LC) to reduce the payment risk that you are exposed to. This will provide greater certainty of payment after you have fulfilled your end of the deal.

   Before shipping out your products, simply ask your buyer to make the payment via an LC (which will be called an Import Letter of Credit on their end). Once they get their bank to issue this LC to OCBC, you can rely on us to verify its authenticity for you. The LC will provide you with the certainty of being paid by the buyer’s bank once you have fulfilled your end of the transaction, provided the LC terms and conditions are complied with.

   After shipping out your product and submitting the relevant trade documents to OCBC, we will check the documents to ensure compliance with the LC terms and conditions before presenting the documents to your buyer’s issuing bank. Once the documents are accepted, the issuing bank will transmit the payment to OCBC while obtaining payment from your buyer. This reduces the risk of payment default as payment is now assured by the issuing bank.

   Overall, LCs can be a valuable solution for exporters. With the assurance of payment, there will be less risk when working with new customers or with very large quantities.

   A note of caution – you need to be extra careful when negotiating the terms on the LCs. As they are documentary based, make sure you can fulfil every term stated on the LC before agreeing to it. Even a small deviation can lead to a non-payment or payment delays.

2. Export Documentary Collection

   By using an Export Document Collection, you (as the exporter) protect yourself by requiring overseas customers to instruct their bank to either pay for the shipment or accept to pay upon receipt of documents. As part of negotiating your transaction and payment terms, you have to decide whether you want to use Documents against acceptance (DA) or Documents against payment (DP).

   As their names suggest, using a DA, documents related to the transaction will be released by the buyer’s bank once your overseas customer (the importer) has given acceptance to make the payment at a later date. Using a DP requires your customer to finalise the payment before the documents related to the transaction are released by their bank.

   To implement this, you will need to submit your commercial documents relating to the export and your Export Documentary Collection application form to OCBC after shipping out your products. OCBC will then process and send your documents to your buyer’s bank. Once your buyer accepts or makes payment, depending on whether you are using a DA or DP, OCBC will notify you.

   With an Export Documentary Collection, you retain control of your shipment until they are paid for (if you are using the DP method) or accepted (if you are using the DA method). As you would be able to tell, the DP method favours the exporter as the payment has to be made before the title documents for the goods are released, while the DA method gives the importer a longer credit term for the shipment.

   If you are using the DA method, you need to realise that there is no payment assurance from the third-party bank, unlike using an LC. This means that you are still exposed to the risk of non-payment. In the event of a non-payment, you can seek legal recourse against the documentary proof of your customer’s acceptance to pay as well as the shipment delivery.

Securing your cash flow needs at the same time

In addition to greater payment protection, you may also require cash flow to protect your daily working capital needs. OCBC understands this concern and has built in credit facilities for such purposes into our trade financing products.

In the case of an Export Letter of Credit, your payment terms are already pre-defined. If you have chosen to give your customers better credit terms, you can fall back on our Export Letter of Credit Discounting to receive an advance payment (subject to approval). As you might have guessed from its name, the amount you receive will be a slightly discounted rate from the full payment (subject to approval).

With Export Document Collection, you may want to opt for the DA method – where your shipment is accepted but your customer will only make payment at a later date. If you have a trade facility, you can still improve your cash flow by tapping on our Export Bill Purchase for a cash advance based on your export documents (subject to approval).

Partner with OCBC for your international trade and expansion needs today. Tap on our diverse range of import-export products and comprehensive suite of SME trade financing solutions.