When it comes to international trade, trust and transparency are of great importance and value. Payment has always been a delicate issue among exporters and importers and along with the numerous risks that come along with international trade, it is essential for everyone involved in the field to know about the payment methods that are common in practice. Below listed are 5 of the most common ways in which payment is done for imports and exports, internationally:
1. Letters of Credit
Also known as documentary credit, the letter of credit is one of the safest payment methods for both buyer and seller. This letter is a guarantee given by the bank to an exporter that is creditworthy, or in other words, says that the amount of money that is to be paid to the seller by the buyer will be done on time. The method of payment is also called banker’s commercial credit and is deployed by exporters and importers when the reliability of both parties is unable to be used correctly at the time. It is widely in use because of the amount of safety associated with it.
2. Cash In Advance
Often used in trade agreements, the cash in advance payment method is the one where the buyer will pay the seller the total amount in cash before the shipment reaches the buyer. Here, sellers/exporters have an upper hand as they are given the complete money irrespective of the fact that the goods reach the buyer/importer or not. Even the ownership of goods is transferred from the seller to the buyer, so anything that happens to the shipment en route will then be the responsibility of the buyer alone. Payments are done through credit cards or wires in this method.
3. Documentary Collections
This method of payment is less common than the above-discussed methods and is particularly uncommon in countries where the enforcement of contracts is weak. Here, the exporter’s bank sends a set of documents to the bank of the importer, saying that these documents have to be produced to the seller, as a request for payment. The information on the conditions and circumstances when the documents will be released by the seller is also explained here. The documents are given to the buyer only after the payment has been made. This can be made either through ‘Document against Payment’ or ‘Document against Ownership’.
4. Open Account
In this method of payment, the seller or the exporter ships the goods and delivers them to the buyer or importer even before the payment s made, which usually ranges between 30 to 90 days in international sales. Here, the method can be successful only when both parties trust each other. As opposed to the ‘Cash in Advance’ method, the open account method is extremely beneficial to the importer and their cash flow. Extension of credit is quite common for exporters in international trade because the competition is really high and the exporters who do not extend the credit for buyers often lose the deal.
This mode of payment is different from that of an open account in the aspect that the payment is made to the exporter or the seller only when the buyer or the importer sells the goods to the final customer. This is extremely beneficial for the importer but it is highly risky for the exporter. But the ownership of the goods remains with the exporter until the sale is completed. The exporter also does not have to spend additional money on inventory as well.
Be it an exporter or an importer, knowing the rules and regulations of international trade, especially when it comes to the area of payment, is extremely important. Understand the kind of business you are in, study the industry and then finally choose a payment method that works the best for your business. You can also hire professional freight forwarders and customs brokers to help you with the documentation and other processes.