5 Common Payment Methods for International Trade


    To be competitive in business today, business owners need to think globally.

    To sell internationally, it's critical to offer appropriate payment methods that are safe and have favorable terms for both the buyer (importer) and the seller (exporter). 

    There are risks involved in international trade. Importers want to receive their goods before making payment, and exporters want to be paid before they release the goods.

    This is why reliable payment methods are important.

    There are 4 main types of payment methods:

    1. Cash in Advance

    The cash in advance method is the safest for exporters because they are securely paid before goods are shipped and ownership is transferred.

    Typically payments are made by wire transfers or credit cards. 

    This is the least desirable method for importers because they have the risk of goods not being shipped, and it is also not favorable for business cash flow.

    Cash in advance is usually only used for small purchases. No exporter who requires only this method of payment can be competitive.

    2. Documentary Credit or Letter of Credit

    A documentary credit, or letter of credit, is basically a promise by a bank to pay an exporter if all terms of the contract are executed properly. This is one of the most secure methods of payment.

    It is used if the importer has not established credit with the exporter, but the exporter is comfortable with the importer’s bank. 

    Here are the general steps in a documentary credit transaction:

    1. The contract is negotiated and confirmed.
    2. The importer applies for the documentary credit with their bank.
    3. The documentary credit is set up by the issuing bank and the exporter and the exporter’s bank (the collecting bank) are notified by the importer’s bank.
    4. The goods are shipped.
    5. Documents verifying the shipment and all terms of the sale are provided by the exporter to the exporter’s bank and the exporter’s bank sends the documents to the importer’s issuing bank.
    6. The issuing bank verifies the documents and issues payment to the exporter’s bank.
    7. The importer collects the goods.

    3. Documentary Collection

    A documentary collection is when the exporter instructs their bank to forward documents related to the sale to the importer’s bank with a request to present the documents to the buyer as a request for payment, indicating when and on what conditions these documents can be released to the buyer.

    The importer may obtain possession of goods if the importer has the shipping documents.

    The documents are only released to the buyer after payment has been made.

    This can be done in two ways.

    Documents Against Payment

    The exporter gives the ownership documents of an asset to their bank, which then presents them to the importer after payment is received.

    The importer can then use the documents to take possession of the merchandise.

    The risk for the exporter is that the importer will refuse to pay, and even though the importer won’t be able to collect the goods, the exporter has very little recourse to collect.

    Here's how Documents Against Payment works:

    1. The contract is negotiated and confirmed.
    2. The exporter ships the goods. The exporter gives his bank all documents confirming the transaction.
    3. The exporter’s bank forwards the documents to the importer’s bank.
    4. The importer’s bank requests payment from the importer by presenting the documents.
    5. The importer pays his bank.
    6. The importer’s bank sends payment to the exporter’s bank.
    7. The exporter’s bank pays the exporter.

    Documents Against Acceptance

    The exporter’s bank on behalf of the exporter instructs the importer’s bank to release the transaction documents to the importer.

    Here's how Documents Against Acceptance works:

    1. The contract is negotiated and confirmed.
    2. The exporter ships the goods.
    3. The exporter presents the transaction documents to their bank.
    4. The exporter’s bank forwards the documents to the importer’s bank.
    5. The importer’s bank requests payment from the importer by presenting the documents.
    6. The importer makes payment and receives the documents and collects the goods.
    7. The importer’s bank pays the exporter’s bank and the exporter’s bank pays the exporter.

    4. Open Account

    An open account is a sale in which the goods are shipped and delivered before payment is due usually in 30, 60, or 90 days.

    This is one of the most advantageous options to the importer, but it is a higher-risk option for an exporter.

    Foreign buyers often want exporters to offer open accounts because it is much more common in other countries, and the payment-after-receipt structure is better for the bottom line.

    5. Consignment & Trade Finance

    Consignment is similar to an open account in some ways, but payment is sent to the exporter only after the goods have been sold by the importer and distributor to the end customer.

    The exporter retains ownership of the goods until they are sold.

    Exporting on consignment is very risky since the exporter is not guaranteed any payment.

    Consignment, however, helps exporters become more competitive because the goods are available for sale faster.

    Selling on consignment reduces the exporter’s costs of storing inventory.

    Read more about types of Trade Finance here.

    The Bottom Line

    The bottom line is that to grow your company to its maximum potential, you should consider selling internationally.

    It opens up new markets to you and helps you to stay competitive.

    Choose the payment options that are right for you and consider who you are selling to when you make your international trade payment decisions.

    When it comes to finding out which method is right for the place you're trading with, read here to learn more about region-specific aspects of international trade.

    One thing we didn't cover in this article was the absolute nightmare it is to deal with foreign currencies.

    Among all these payment methods, even if you find one that suits you, you still need to deal with foreign exchange payments.

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