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5 Common Payment Methods for International Trade

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The 5 common payment methods for international trade include cash in advance, letters of credit, documentary collection, open accounts, and consignments. 

Each payment method has advantages and disadvantages, so choosing the right one is crucial to ensure smooth transactions and mitigate risks.

Cash in advance is the safest payment option for sellers, while buyers often prefer methods that offer more flexibility and control, such as open accounts and letters of credit. 

International trading can be daunting for business owners who just started expanding globally, especially when it comes to cross-border payments.

Whether selling to or buying from overseas markets, it’s critical to use appropriate payment methods that are favorable for both parties to ensure timely buyer payments and good trade relationships.

So how do you securely make international payments? This article will introduce you to the 5 common payment methods for international trade, including the pros and cons of each method to help your business confidently navigate global markets. 

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Tip: Learn more about how to transfer money internationally to optimize your cross-border payment processes. 

1

Cash in Advance

Cash in advance is one of the most commonly used international payment methods. It refers to when the buyer pays the seller in full before the goods are shipped. The common ways to pay cash in advance include:

  • Wire Transfers - This involves the buyer making a direct electronic fund transfer to the seller’s bank account, typically via SWIFT.
  • Credit Cards - Credit card payments are widely accepted, especially for smaller transactions. 
  • Payment Platforms - The buyer can also make payments through online payment service providers like PayPal and Stripe. 
  • International Payment Gateways -These platforms facilitate international transactions and often support multiple currencies.

Using the cash-in-advance payment method is the safest for exporters because they receive payment before goods are shipped and ownership changes hands. 

On the other hand, it is not quite preferable for importers as there’s a risk of not receiving the goods, which can affect business cash flow and operation.

Letter of Credit Pros & Cons

Pros

Cons

Buyer

  • Establish a commitment to purchasing the goods
  • The seller may fail to ship the goods 
  • Payments may be hard to recover in cases of scams or undelivered shipment
  • Immediate effect on cash flow management

Seller

  • Eliminates the risk of non-payment as the payment is made before shipment
  • Immediate access to funds that can be used for manufacturing, shipping, or other business needs
  • Buyers may not trust new or unfamiliar suppliers
  • Buyers who prefer more flexible payment terms may not be interested

2

Letter of Credit

A letter of credit (LC), also known as a documentary credit, is a binding promise by a creditworthy bank on behalf of the buyer to pay the seller once the specified terms and conditions of the sales contract are met.

It is one of the most secure methods of payment in international trade, as the seller can rely on the bank's trustworthiness, and the buyer does not have to pay for the goods in advance. A letter of credit is particularly useful for larger transactions or when dealing with new or unfamiliar trading partners. 

Here are the general steps in a letter of credit transaction:

  1. The buyer and seller agree on the terms of the sale, including price, quantity, shipping details, and payment method.
  2. The buyer applies for a letter of credit with their bank, providing transaction details.
  3. After assessing the buyer’s creditworthiness, the bank issues the LC to the seller’s bank, which will then inform the seller. 
  4. The seller ships the goods according to the contract terms and prepares the necessary documents, such as a commercial invoice
  5. The seller presents the documents confirming the shipment to their bank, which will forward them to the buyer’s bank.
  6. If the documents comply, the buyer’s bank will release the payment to the seller’s bank and forward the documents to the buyer. 
  7. The buyer collects the purchased goods. 

Letter of Credit Pros & Cons

Pros

Cons

Buyer

  • The payment is only made after receiving the goods
  • Protects the buyer from paying for goods that are not delivered or do not meet the specified quality standards
  • Issuing an LC can be costly, and the buyer is responsible for covering the fees 
  • Requires a lot of documents and can be time-consuming

Seller

  • The payment is guaranteed by the buyer’s bank, reducing the risk of outstanding invoices.
  • Gives a competitive advantage in international markets
  • Requires several documents and must follow a strict timeline
  • Delays may occur if the documents are not presented correctly

3

Documentary Collection

Documentary collection is another common international payment method among traders. It involves banks acting as middlemen, exchanging shipping documents like bills of exchange (drafts) and commercial invoices to ensure the buyer gets the goods and the seller gets paid.

Unlike a letter of credit, documentary collection only involves banks as intermediaries for the transaction; it does not guarantee that the buyer will pay. 

Documentary collection can be done in 2 ways: pay at sight (document against payment) or on a specified date (documents against acceptance).

Documents Against Payment (D/P)

In a Documents Against Payment (D/P) arrangement, the buyer can only get the shipping documents and the goods after making a full payment

However, the seller may have to deal with unclaimed goods in a foreign country if the buyer refuses to pay, as they can’t collect the goods without the shipping documents. 

The steps involved in a document against payment transaction are as follows:

  1. The buyer and seller agree on the sales contract, and the buyer requests a D/P from their bank.
  2. The seller ships the goods to the buyer. 
  3. The seller gives the shipping documents to their bank.
  4. The seller’s bank forwards the documents to the collecting bank (the buyer’s bank)
  5. The collecting bank sends the documents to the buyer and requests payment.
  6. The buyer pays the collecting bank.
  7. The collecting bank releases the shipping documents to the buyer, who can use them to receive the goods.
  8. The collecting bank pays the seller’s bank, which then pays the seller. 

Documents Against Acceptance (D/A)

If a Document Against Acceptance (D/A) is arranged, the seller’s bank will instruct the collecting bank to release the shipping documents to the buyer once they accept a time draft to pay at a specified date. 

The steps involved in a D/A transaction are similar to those in a D/P transaction, with a difference in the timeframe of payment. 

  1. The seller and buyer agree on a trade deal. 
  2. The seller ships the goods to the buyer and gives the shipping document to their bank.
  3. The seller’s bank sends the shipping documents to the collecting bank.
  4. The collecting bank forwards the documents and time draft to the buyer.
  5. The buyer accepts the time draft and promises to pay at the specified date.
  6. The collecting bank releases the documents to the buyer for shipment collection.
  7. The buyer collects the goods using the documents and pays the collecting bank on the due date.
  8. The collecting bank transfers the payment to the seller’s bank.

Documentary Collection Pros & Cons

Pros

Cons

Buyer

  • Cheaper than a letter of credit
  • The buyer can inspect goods before making a payment with D/A
  • Potential for delays in receiving documents
  • Payment with D/P has to be made before the goods are inspected

Seller

  • The seller retains ownership of goods until the payment is made
  • No guarantee of payment
  • The seller may have to pay for the return shipment in case of cancellation. 
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4

Open Account

Open account (O/A) is one of the common international payment methods in trade finance. However, it is also one of the riskiest for the seller.

In an open account transaction, the seller (exporter) ships goods to the buyer (importer) before receiving payment that is typically due within 30, 60, or 90 days after the invoice date or delivery. 

The payment-after-receipt structure of an open account arrangement makes it an attractive option for many foreign buyers, offering flexibility and control in managing cash flow and working capital. 

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Tip: It’s important for both the buyer and seller to do their research and credit checks before agreeing on open account terms to avoid costly disputes and potential delays.

Open Account Pros & Cons

Pros

Cons

Buyer

  • Payments are not due instantly 
  • Buyers can inspect the goods before making a payment
  • Offers less protection in case the seller fails to deliver goods compared to other methods

Seller

  • Attracts more buyers and potentially increases sales and market expansion
  • Offers flexibility for buyers who prefer not to pay upfront
  • Less paperwork involved than letters of credit or documentary collections
  • No guarantee that the buyer will pay within the due date
  • Chasing unpaid invoices can be challenging and costly
  • Delayed payment can disrupt cash flow

5

Consignment

Consignment is an international payment method in which the exporter (seller) ships goods to a foreign distributor but retains ownership and only receives payment once the products are sold to the end customer

Exporting on consignment is very risky since the exporter is not guaranteed any payment. However, it helps exporters become more competitive as goods are available for sale to international customers faster. 

Selling on consignment also reduces the exporter’s costs of storing inventory, as the distributor is typically responsible for storing and marketing the products. 

Consignment Pros & Cons

Pros

Cons

Buyer

  • Allows the buyer to test the market demand before importing a larger purchase
  • Can earn a higher profit margin if the goods sell well
  • Potential for disputes over unsold goods or damaged items

Seller

  • Enables testing new markets without having upfront investment
  • Reduces inventory holding costs
  • High risk of non-payment if the buyer fails to sell the items
  • Payment is not made until goods are sold to the end customer
  • Limited control over how the goods are marketed and sold in a foreign country

Bottom Line

When considering a payment method for international sales, it is good to consider the different methods and their pros and cons to choose the best one for your business and clients. 

It is also a good idea to offer multiple payment methods to provide flexibility and convenience for your customers when doing global trade.

Despite these choices of international payment methods that you can use to accept international payments, there are certain challenges that you may come across, particularly foreign currencies and exchange rates.

If you are looking for an easy and convenient way to send and receive payments in foreign currencies, consider Statrys.

Statrys is an award-winning financial service provider offering business accounts and company incorporation services in Hong Kong and Singapore. Statrys business accounts can facilitate your business operations with the following features:

  • A multi-currency business account in Hong Kong 
  • Hold and manage 11 currencies with a single account number
  • Virtual and physical MASTERCARD payment cards with built-in controls and limits to manage business expenses
  • FX services at competitive exchange rates (spot and forward contracts).
  • All transaction fees are cheaper than with traditional banks.
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FAQs

What are the common payment methods for international trade?

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Cash in advance, letters of credit, documentary collection, open accounts, and consignments are the five major methods of payment in international trade. 

Which international payment method is the safest for the seller or exporter)?

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What should I consider when choosing a payment method for international trade?

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How can I optimize my international trade finances?

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