To succeed in today’s international market and win sales against competitors, exporters must offer their customers appealing sales terms supported by the suitable payment methods. As getting on-time payment is the ultimate goal for each exporter, a suitable payment method must be carefully chosen to minimize the payment risk while also considering the needs of the buyer.
These are the five primary methods of payment for international transactions:
1. Cash-in-advance: With cash-in-advance payment terms, an exporter can minimize or avoid credit risk because payment is received before the ownership of the goods is transferred. For international sales, credit cards and wire transfers are the most commonly used cash-in-advance options. With the advancement of the Internet, escrow services are becoming another cash-in-advance option for small export transactions.
2. Letter of Credit: Letter of credit (LC) is one of the most secure instruments available for international trades. An LC is a commitment done by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions which are stated in the LC have been met. The buyer establishes credit and pays his or her bank to avail this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain but the exporter is satisfied with the reliability of the buyer’s foreign bank.
3. Documentary Collections: A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment of the sale. Funds are received from the importer and transferred to the exporter through the banks involved in the exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The collection letter includes instructions that state the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offer no verification process and limited options in the event of non-payment and also D/Cs are generally less expensive than LCs.
4. Open Account: An open account transaction takes place when a sale where the goods are shipped and delivered before payment is due, which in international sales is typically 30, 60 or 90 days. It is one of the advantageous options to the importer in terms of cash flow and cost, but at the same it is also one of the highest risk options for an exporter. Exporters can offer competitive open account terms while significantly mitigating the risk of non-payment by using one or more of the appropriate trade finance techniques. When offering open account terms, the exporter can also seek extra protection using export credit insurance.
5. Consignment: Consignment in international trade is a variation of open account which is based on a contractual arrangement in which payment is sent to the exporter only after the goods have been sold to the end customer. Consignment helps the exporters to become more competitive on the basis of better availability and faster delivery. The key to success in exports is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance is very important to cover the safety of consigned goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment.