Letter of Credit, Open Account, Documentary Collection

As I found my seat on the plane in O’Hare Airport to return to Denver, I introduced myself to the passenger next to me. He introduced himself as the controller of a meat packing plant in Colorado. My international banking instincts caused me to ask, “Do you export your product?”

He replied, “Yes, we export boxed beef.”

I next probed, “How do you get paid?”

“Cash,” was his short answer.

Letters of Credit and Other Methods of Payment

In my experience, most exporters use all or most of the various payment methods: cash, letters of credit, documentary collections and open account. Industry and market conditions often dictate the choice. When asking the question, “How do you get paid?” I expect answers such as: “We get paid by cash when selling to countries A and B, Letters of Credit in country C, and open account to our established distributors in countries D and E.”

My fellow passenger’s short answer caught me off-guard because I expected a more elaborate response. “Cash?” I asked. “Don’t you ever ship on a letter of credit?”

“No way,” he said with conviction. “If I can’t collect payment on a letter of credit, I’m not swimming after the boat to get our goods back.”

Leniency with Payments Can Be a Competitive Advantage

He implemented a hard and fast credit policy. One has to admire the quality of his foreign receivables. He slept well at night and never had to inform his president of a slow paying customer overseas. However, one has to wonder if this policy didn’t limit their ability to expand their export markets. Certainly they had competitors who offered more lenient terms. Competing involves more than just pricing. Payment terms often dictate the success of an overseas sale.