Prepayment refers to a settlement method in which the buyer (importer) first remits all or part of the payment to the seller (exporter) through the bank. After the seller receives the payment, it will ship the goods to the importer within a certain period of time or immediately according to the contract signed in advance by the buyer and seller. In practice, prepayment is usually called pre-T/T. According to the amount and proportion of the importer’s previous remittance, pre-TT can be divided into full pre-T/T and partial pre-T/T, the latter of which is usually called down payment.
This method is a prepayment for the importer and a prepayment for the exporter. For the bank, prepayment is an outgoing payment, while prepayment is an incoming payment. In international trade, the exporter will not ship the goods until the bank that handles the incoming payment business settles the exchange with the exporter, so this settlement method is also called “first settlement, then outgoing”.
Prepayment of goods is extremely beneficial to exporters, mainly based on the following three reasons: first, a payment has been received before the goods are shipped, which is equivalent to an interest-free loan; second, the goods are shipped after receiving the payment, which reduces the risk of selling the goods. If the importer breaks the contract, the exporter can confiscate the advance payment; third, the exporter can make full use of the advance payment, and even purchase and ship the goods after receiving the payment.
Prepayment of goods is extremely disadvantageous to importers, mainly based on the following two reasons: first, the payment is paid before the goods are received, resulting in difficulties in capital turnover and interest losses; second, the payment has been made before the goods are received. If the goods cannot be received in the future, cannot be received on time, or the goods do not conform to the contract, they will suffer losses or bear risks.
In order to protect their own rights and interests and reduce the risk of prepayment of goods, importers generally reach a conditional agreement on the release of the payment with the exporter through a bank, which is usually called the release condition. The condition is proposed by the importer when remitting the remittance and executed by the paying bank when releasing the payment. Common payment conditions are: when the payee withdraws the money, he must issue a personal written guarantee or a bank guarantee to guarantee that the goods will be delivered on time after receiving the payment, otherwise the payment received will be returned with interest; or guarantee to provide a full set of shipping documents, etc. In addition to additional payment conditions, importers sometimes ask exporters to pay a discount on the imported goods as a compensation for the interest loss caused by the advance payment.
Generally speaking, advance payment applies to the following situations: the exporter’s goods are in high demand in the importing country’s market, and the importer urgently needs the goods to obtain high profits, so he is willing to pay in advance; the importer and exporter have a close relationship and understand each other’s credit status, and the importer is willing to purchase the goods with advance payment; the seller’s goods are in hot demand, and the exporter and importer are doing business for the first time. The seller does not know the buyer’s credit well and is worried that the buyer will not fulfill the payment obligation according to the contract after receiving the goods. In order to ensure the safety of the exchange, the seller proposes to make advance payment a prerequisite for delivery.