What do we mean by payment terms and Incoterms?

Payment terms are the payment provisions (or details), that have typically been negotiated between the exporter and the foreign buyer, regarding the settlement of a transaction. These terms will normally indicate (or at least imply) the method of payment, when payment must take place, what credit is being allowed and for how long, and when delivery is expected. Click here to learn more about payment terms. These payment provisions will clearly impact on distribution. For example, by setting the delivery date of the goods in an Letter of Credit will place certain time constraints on the distribution of the goods to reach the destination by the time and date specified. Selling on a consignment basis, for example, will also mean that you need to account for perhaps having to return the goods not sold to South Africa. What is more, you will need to pay for the distribution of the goods in advance and this may encourage you to choose the cheapest transportation alternative in order to keep costs down.

In exporting, payment terms commonly incorporate one or other agreed-upon Incoterm (standing for international commercial term), such as EXW, C&F, CIF or DDP. Click here to read more about Incoterms. The purpose of these Incoterms is to spell out clearly where the responisbilities of the exporter and import lie in respect of distribution and payment. For example, with EXW (ExWorks), the exporter is responsible to deliver the goods at the factory door in South Africa, while for CFR, the seller is responsible for the goods until such time as they cross the ship’s rails in South Africa (even though the seller – the exporter – pays for the freight). What is more, CFR is intend for ship transportation only. Clearly, depending on which of these two (or any other) Incoterms forms the basis of the payment terms, the distribution responsibility of the exporter will vary considerably. Thus payment terms and Incoterms directly affects the distribution function.