Competing globally is a great way for companies to expand their business. However, international trade does offer a spectrum of risk that could cause delayed payments or even non-payment. Since getting paid in full and on time is the number one goal, exporters and importers must work together to find a fair method of payment for both parties. So, to give your company a strong edge in today’s hyper-competitive global market, it’s important to understand the different payment methods in international trade to ensure timely payments for your business.
This payment method is 100% in favor of the exporter aka, you! Cash-In-Advance is simply when you receive payment prior to shipping the goods to the buyer. Hence, eliminates risk of non-payment or delay in payment. Now, this might be hard to negotiate with your potential customer because of the buyers concern being that the goods have not yet been shipped. Also, it is the least appealing payment method to the buyer, which could lead your potential customer to shop for other vendors that may offer more attractive payment methods. Especially in a highly competitive market.
Letter of Credit
A letter of Credit (LC) is a document issued by a bank that is used for a guarantee of payment when buying and selling goods. A commercial letter of credit is commonly used when doing business with an international customer, the reason for this is because it adds a level of security when dealing with unknown partners. Letters of Credit work as follows: The buyer will apply for a letter of credit at their bank of choice, giving specific criteria for the seller to meet prior to sending funds. If the seller has fulfilled all the requirements that the buyer has requested in the LC, the bank will release funds directly to the seller. Although, if the seller does not fulfill ALL the requirements spelled out in the letter of credit, the seller could potentially not get paid.
Documentary Collections (DC) is an option that provides an intermediate level of risk between an open account and a letter of credit (LC). There are two types of documentary collections: Documents Against Payment (DP) and Documents Against Acceptance (DA). DP allows you to maintain control of the goods until payment and DA provides a document pledging payment terms, still more secure than an open account. The more commonly used DP works as follows: The exporter will authorize their bank to send documents to the specified importers bank overseas, instructing that the buyer will take possession of the goods at the port. Once the goods arrive, the buyer will obtain the goods from the shipping line, releasing funds to their bank. The buyer’s bank then receives the funds and they will remit to the exporter’s bank.
Open Account (Terms)
An open account is when a sale has taken place and the goods have been delivered to the buyer before payment is due. Payment terms are determined between the buyer and supplier, usually giving the buyer 30, 60 or 90 days to pay. Having open account terms is extremely common in domestic sales because the supplier can extend the buyers payment terms which can make the transaction more appealing to the buyer. Open account terms work the same way in international trade but the risk is much greater. The concern of having an open account with foreign buyers is that you do not have recourse in case of non-payment or a delay in payment. There is foreign trade credit insurance that will cover the supplier’s receivables in the event of a default but waiting potentially 90+ days to receive payment can raise some serious cash flow problems to the supplier. If having open account terms with your foreign customer will get you the sale, take it, but ensure getting paid by getting foreign credit insurance and it might pay off to research into selling your unpaid invoices to a factor for cash up front to keep your business thriving.