The importance of payment methods when exporting wine
A payment method is the agreement you have with your buyer that sets out the terms for when and how they will pay you.
While it sounds simple enough, setting up how you will receive payment for your wine exports is far more complex than for domestic sales. Things to consider include:
- Your buyers’ preferences
- Market requirements and restrictions
- Your own financial situation – particularly if cash flow may be an issue
- Your personal risk tolerance.
There’s no one-size-fits-all payment method in the wine industry, so it’s important you conduct your own due diligence about which payment methods to use. For some wine exporters, their payment methods may change as they become more experienced and enter more complex markets.
Know your Incoterms®
Incoterms® are the terms that you and your overseas buyer agree to when trading, including payment methods. They cover:
- Rules and regulations around delivery and payment
- Risks involved in the sale and delivery of your product
- Other conditions related to exporting and importing.
The Incoterms® you and your buyer agree on will state who is responsible for organising, paying for and managing:
- Shipment, transport and carriage
- Insurance
- Export certificates
- Duties, taxes and export documentation
- Customs clearance and other logistical activities.
Wine exporters must have a comprehensive understanding of Incoterms® in order to successfully operate in new regions. For more detailed insights, see Understanding Incoterms® 2020.
Examining 6 different payment methods
There are multiple options when it comes to payment terms for your wine exports. Each offers its own pros and cons, so finding a balance between a method that is comfortable for you and which meets your buyer’s needs will be best for all parties. Ultimately, you want methods that ensure – as best as possible – that you will receive payment for your wine, while also guaranteeing your customers will receive their purchases.
Here’s an outline of the six common payment methods.
1. Open account
Also called 'open credit', this is an agreement where you ship your wine and invoice the buyer (typically a wine importer). The buyer then makes payment based on the terms in the contract agreement.
The buyer agrees to pay for your wine shipment by the date of arrival, or a set timeframe thereafter (e.g. 30 days from delivery). For those new to wine exporting, this payment method may present unsustainable risk, as the buyer gets control of the wine before payment needs to be made. Commonly, an open account is used between parties who have already done business for a lengthy period and have established a level of trust.
2. Documentary collections
Documentary collections are the ‘middle ground’ between letters of credit and open accounts. The banks hold all the shipping documents – including the bill of exchange – until the buyer pays or agrees to pay at a future date.
The payment method is completed either ‘at sight’, which means the bank only releases the documents after payment is made, or ‘after sight’, which means they are released as soon as the bill is signed and the exporter offers credit for a set period (usually 30, 60 or 90 days).
Because buyers don’t need to make advance payments before the wine is shipped, documentary collections are very common for international trade.
3. Letters of credit
This is a guarantee from your buyer's bank stating that they will pay you according to the terms in the letter. If they are unable to pay, their bank must cover the full or any remaining amounts payable.
Given the bank guarantees payment will be made on time, letters of credit are a low-risk option for both wine exporters and buyers. However, it is also the most complex payment method and therefore the most expensive, so you need to factor that into your decision making.
4. Payment in advance
Payment in advance is when the buyer pays you – via telegraphic transfer, bank draft or international cheque – before you ship the goods. It’s the safest method for wine exporters because there is no risk that you won’t be paid before you ship the wine.
However, because the buyer bears all the risk in the case of non-delivery, it may be a hard sell to convince importers that this payment method is acceptable. It is generally only used when there is urgency to the deal, or if the contract is iron-clad.
5. Payment post-shipment
The inverse of payment in advance, payment post-shipment is when you ship and agree to the release of the wine before the buyer makes payment. They will pay you when they receive the goods, or at a previously agreed date following delivery.
This is the highest-risk payment method for sellers and may be deemed untenable by most wine exporters.
6. Consignment
The consignment model is becoming increasingly relevant for wine exporters who are operating in the USA. It’s a variation on the ‘open account’ payment method, with wineries being paid based on transactions between the US-based importer and distributor.
Credit terms
External forces outside of both your and your buyer’s control can sometimes cause terms to require a compromise. Take, for example, a situation where a winery wants the standard 90-day payment from leaving port, while the importer is asking for 180 days due to major shipping delays.
In these instances, it’s recommended you open the line of communication to try to find a ‘win-win’ scenario. Perhaps you agree on language such as “Payment to be made 30 days after the importer receives the product in their warehouse, or 120 days after leaving port – whichever comes first.”
Risk profiles of each payment method
| RISK TO YOU | RISK TO BUYERS | |
|---|---|---|
| Open account | Very high You ship and release the goods before you get paid.You need to manage your cash flow until you get paid, which could be up to 180 days depending on the credit terms. | Very low The buyer receives your wine before they have to pay for it.This can help the buyer's cash flow as they can sell your wine and leverage interest benefits before they have to pay. |
| Documentary collections | Medium The buyer does not receive the wine until they have paid you.Receipt of payment is quicker, and you hold the title of goods until you receive payment. The bank does not guarantee payment.If the buyer can't or doesn't pay, you may need to cover the cost of return of your wine. | Medium The buyer has some confirmation that you have shipped the wine before they have to pay for it. |
| Letters of credit | Low to medium You have a guarantee of payment and protection against buyer insolvency.Your buyer can't hold funds or refuse payment based on objections to the quality of your wine. | Medium If you don't meet the terms and conditions of the letter, the bank holds on to the buyer's funds until the date agreed on in the letter.This affects their ca |
| Payment in advance | Low You get paid before you ship the wine. | High Must pay for your wine upfront. This affects their cash flow and they risk non-delivery of the product. |
| Payment post-shipment | Very high You ship the wine and the buyer receives it before they have to pay you.They may not honour this agreement if there is a dispute or they are experiencing payment difficulties. | Very low The buyer receives your wine before they have to pay for it. |
| Consignment | Medium Increased risk for the winery if the product does not move. However, the exporter exerts more control as they own the wines. | Medium The importer only makes money when the product is sold to the distributor. |
Checklist: Choosing the right payment method
- Do your due diligence and research to find out as much as you can about a buyer before you do business with them.
- Run credit checks through reputable international agencies, especially if you are considering offering credit terms.
- Think carefully about how you will fund any new contracts without going into debt. Your existing clients or suppliers might be able to help you.
- Consider what strategies to use to manage cash flow and risks.
- Speak to your business banker to assess your current situation and work out the next best steps.
- Ask your bank if they can offer you a secure loan or commercial bill facility to help finance your wine exports.
Foreign exchange (FX) management
When you are dealing in foreign currencies, you'll need to manage any fluctuations to the region’s currency exchange rate.
For example, if you invoice a Hong Kong buyer in their local currency (HKD) and the Australian dollar (AUD) decreases in value before they pay, you will get less AUD than expected. In this case, the change in the value of the AUD has reduced your margins and profit.
There are two main options to help manage these FX risks:
- Foreign exchange market: The foreign exchange market allows you to convert one currency into another. This means you can invoice your customer in their local currency and convert it to AUD when the exchange rate is better.
- Foreign exchange hedge: A foreign exchange hedge is organised by your bank. You agree to a fixed exchange rate, which helps you avoid fluctuations in the market. The amount you invoice for is the amount you will receive.
Managing the volatility of the Australian dollar isn’t easy. Make sure you:
- Recognise your exposure to AUD volatility
- Understand the different management strategies available to you
- Develop and implement an FX management plan
- Regularly monitor the plan and make changes as market conditions evolve.
Payment protection
Protecting yourself against financial risks is one of many serious considerations for wine exporters. While insurance is a smart way to reduce your financial risk – e.g. export credit insurance – there are more options you may want to consider when it comes to managing these risks:
- Trade loans: A trade loan or trade finance loan is a short-term working capital loan to help you finance your trade commitments. You can apply for a trade loan at any stage of the export or trade transaction depending on your needs at the time. This may include:
- when you are awaiting payment from a buyer
- if a buyer defaults or becomes insolvent
- to finance shipment under documentary collections, payment post-shipment, or open account terms; and
- to support an increase in wine production volumes.
- Shipping guarantees: Shipping guarantees come under a letter of credit with a full set of documents of title to the goods. Banks issue shipping guarantees to the buyer's customs broker or freight forwarder. This permits the release of goods that have arrived ahead of the shipping documents. You have a guarantee of payment when the buyer receives the goods rather than waiting until the documentation arrives. You are also covered if the buyer refuses to pay or if they become insolvent.
