Three payment methods in import and export international trade

In order to succeed in today's global market, exporters should provide their customers with attractive sales terms, supplemented by suitable payment methods. The ultimate goal is to pay in full on time for each export sale. Applicable payment methods must be carefully selected to reduce payment risks while meeting the buyer’s needs.

There are multiple payment methods, including different levels of collection risks. We will try to explain these methods in order from the safest to the least safe for the exporter.

1. Cash-in-Advance

The cash advance payment clause can help exporters avoid credit risk because payment is received before the transfer of ownership of the goods. For international sales, wire transfers and credit cards are the most commonly used prepaid cash options for importers. This brings the least risk to the seller and the greatest risk to the buyer.

However, requiring advance payment is the buyer’s least favorite option because it generates unfavorable cash flow. Especially when traders don’t know each other, buyers are worried that they may not be able to ship goods if they pay in advance. In addition, exporters who insist on using this payment method as their sole mode of operation may lose out to competitors who offer more attractive payment terms.

2. Letters of Credit

Letter of Credit or "Letter of Credit" is one of the safest payment methods available to international traders. This is a letter from the bank guaranteeing that the correct amount of payment from the buyer to the seller will be received on time. It is one of the safest payment methods available to international traders. The buyer establishes credit and pays a service fee to its bank. A letter of credit is useful when well-founded credit information about a foreign buyer does not exist or is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. The letter of credit can also protect the buyer because they do not need to pay until the goods are shipped as promised.

3. Documentary Collections

In the documentary collection process, the seller instructs its bank to forward the documents related to the export of goods to the buyer’s bank, and instructs to submit these documents to the buyer for payment, and specify when and under what circumstances these documents can be handed over buyer. buyer. Funds are received from importers and transferred to exporters through participating banks in exchange for these documents. Documentary collection involves the use of a bill of exchange, requiring the importer to pay the denomination on the spot (document against payment) or on a specified date (document against acceptance). The collection letter provides instructions and specifies the documents required to transfer the ownership of the goods.

Although the bank does act as a facilitator for its customers, documentary collection does not provide any verification process and has limited recourse in the event of non-payment. They do not provide the same level of security as letters of credit, but they are therefore less costly. Unlike the letter of credit, for documentary collection, the bank acts as a channel for documents, but does not issue any payment contract (payment is not guaranteed). The bank receiving the documentary collection can only debit and make payment from the buyer's account with the buyer's authorization.