Methods of Payment in International Trade

5-Payment Methods for Exports & International Trade

To succeed in today’s global marketplace, the exporters must be able to provide attractive sales terms and suitable payment methods. The eventual purpose here that the exporter gets paid in full and on time. In doing so, the exporter has to ensure that the most apt payment method is selected the reduce the risks associated with the payment while fulfilling all the needs of the buyer.

There is a variety of ways in which payments can be made with varying levels of risk. In this blog, we shall try to explain different methods that are available for exporters. Here it is:

• Cash-in-Advance: This is the kind of payment method that allows the exporter to avoid credit risks. In this, the payment for the goods is received upfront before the ownership is transferred to the buyer. In international trade - wire transfer and credit cards are the most commonly used options in this type of payment. It represents the least risk to the seller and the maximum risk for the buyer making it among the least favored payment option among buyers. This type of payment option is least exercised when the seller and buyer do not know each other personally.

• Letter of Credit: This is a “credit letter” generated from a bank that guarantees the buyer that the buyer’s payment to a seller will be received on time with the correct amount. This type of payment is especially helpful when it is difficult to find credible information about a foreign buyer. As a substitute, the seller is provided with the creditworthiness of the buyer from none other than a legitimate banking institution. Moreover, the letter of credit protects the buyer from making any payment to the seller until the goods have been shipped.

• Documentary Collections: In this payment method, the seller instructs their bank to forward documents to the buyer’s bank to complete the payment formalities. The documents would have the necessary instructions on when and what circumstances the documents need to be released to the buyer. Funds are received from the buyer and transferred through the bank involving the exchange of necessary documents. Generally, document collections expect the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). Although it is considered a reliable method, it does not offer any sort of verification and limited recourse in case of non-payment.

• Open Account: This type of transaction involves shipping and delivering goods before the due date of the payment. In international sales, the payment window typically consists of 30, 60, or 90 days. In this type of transaction, the level of trust between the transacting parties needs to be high and offers an advantageous option for the buyer or the importer. At the same time, it is laden with risks for the exporter or the seller. In export markets with a high degree of competition, foreign buyers often coax sellers for open account terms in place of the more common letter of credit.  If the seller takes a firm stance on the letter of credit, they may very likely lose the sale.

• Consignment: This is another open account method wherein the exporter is only paid by the buyer only when the foreign distributor sells the goods to the end customer. This is based on a contractual agreement where the importer receives, manages, and sells the goods for the exporter who retains the title of the goods until they are sold. Clearly, such an engagement contains a high risk for the exporter as there is always the chance of non-payment from an independent foreign distributor.  

Conclusion:

Although each of the payment methods mentioned here comes with an inherent risk. For an exporter, it is always prudent to partner with a reputable and trustworthy foreign importer and third-party logistics provider. Lastly, the exporter must have in place the necessary insurance for goods in transit over long distances to hedge the necessary risk associated with international trade.