In the garments sector, as with many industries involved in international trade, payment terms can vary based on the relationship between the buyer and the seller, the nature of the order, and the specific demands of either party. However, there are some commonly preferred payment terms in the sector:
1. Letter of Credit (L/C): This is one of the most secure methods of payment for exporters, especially with new customers. A letter of credit is a commitment given by a bank on behalf of the buyer that payment will be made to the seller provided that the terms and conditions stated in the L/C have been met.
2. T/T (Telegraphic Transfer):
– Advance T/T: Where a buyer transfers a certain percentage (often 30% to 50%) of the total order value upfront, and the balance is paid once the goods are ready or as per the agreed terms.
– Balance T/T: The remaining amount is transferred once the buyer has inspected the goods or received documents like the Bill of Lading.
3. Open Account: Under this arrangement, goods are shipped, and delivery documents are sent to the buyer with the agreement that payment will be made at a future date. This method is typically used for buyers and sellers who have a long-standing relationship and mutual trust.
4. Documentary Collections (D/P – Documents against Payment and D/A – Documents against Acceptance): This method uses banking channels but doesn’t offer the same security as an L/C. Under D/P, documents are only handed over to the buyer upon payment, while under D/A, documents are handed over on the buyer’s acceptance of a draft, agreeing to pay by a specified future date.
5. Cash in Advance (CIA): The buyer pays the seller in advance before the product is manufactured or before it is shipped. This method is favored by sellers when the buyer’s creditworthiness is in doubt.
6. Consignment: In this arrangement, payment is sent to the supplier only when the goods are sold by the third party (typically a retailer). If the goods aren’t sold, they may be returned.
7. Net Terms (e.g., Net 30, Net 60): The buyer must make the payment within 30 or 60 days (or another agreed period) of the invoice date.
8. CAD (Cash Against Documents): Payment is made in exchange for the shipping documents. The buyer pays for goods upon receiving the title of the shipped items.
9. Revocable or Irrevocable L/C: A revocable L/C can be changed or canceled by the issuing bank at any time without prior notice to the beneficiary. An irrevocable one cannot be amended or canceled without the agreement of both parties.
10. Confirmed or Unconfirmed L/C: In a confirmed L/C, another bank (typically the seller’s bank) adds its commitment to pay if the issuing bank defaults. An unconfirmed L/C doesn’t have this added layer of security.
When choosing payment terms, both the buyer and the seller must consider their cash flow needs, the level of trust in the relationship, the risks associated with the transaction, and the prevailing practices in their respective countries and the garment industry.