A Comprehensive Guide on Payment Methods in International Trade

December 10, 2022
a comprehensive guide on payment methods in international trade

The expansion of online and technological resources has simplified company operations globally. Consumers, retailers, manufacturers, and others in the supply chain are adopting new payment methods.

Legal procedures and inspections are required for international trade by the laws of both the exporting and receiving countries. Because of this, it is challenging to weigh the pros & cons of various modes of payment and settle on one agreeable to all parties involved in an exchange.

Methods of Payment in Global Trade

Various considerations, including cross-border costs, exchange rates, currency conversion, and local legislation, affect the feasibility of accepting payments from customers in different parts of the world. Moreover, there are hazards involved with the transfer of funds between parties in other countries:

  • Exposure to fluctuations in foreign exchange rates: They are typically seen with shifts in exchange rates.
  • Political risk: Occur when nations introduce new regulations that make it harder for businesses to operate such tariffs.

Export payment terms and their types

1. Letter of Credit

It is a standard and secure method of payment for overseas transactions. A Letter of Credit is a written guarantee from the buyer’s bank to the exporter (LC). The bank guarantees the importer’s payment to the exporter within the specified time frame and following the previously agreed-upon terms and conditions.

  • Pros

Helpful, as the exporter can rest easy knowing that their goods will be received in good condition by their customer’s foreign bank.

  • Cons

Time and money are required for this procedure.

2. Cash in advance

Exporters can avoid taking on any credit risk by requiring payment before goods are sent out, as is the case with cash in advance conditions of payments in international trade. Cash-in-advance export payment methods often include electronic payments and credit cards for foreign transactions.

  • Pros

For exporters, the advantages of this strategy include receiving payment in full before goods are shipped. There is zero danger of a buyer from overseas not paying.

  • Cons

Some international purchasers may hesitate to pay in advance for the risk of not obtaining the promised high-quality goods. Companies that only accept cash in advance as a form of payment in global trade may miss out on sales to others whose payment terms are more desirable.

3. Open account

When doing business internationally, it is common practice to ship the items to the importer before receiving payment. Credit terms of 30, 60, or 90 days are standard and can be agreed upon for payment.

  • Pros

The ability to control the credit period allows the importer to manage their cash flow better. This payment method in global trade can be an advantage for exporters in the current economic climate.

  • Cons

Exporters take a big chance when using open account procedures. This payment method works best when there is already a trusted relationship between the buyer and vendor.

4. Document collection

It is a standard payment term in international business transactions, during which both parties must use their banks to settle the bill. The exporter is represented by the bank doing the remittance, whereas the importer is represented by the bank doing the collection.

The exporter has to provide the remitting bank with shipping paperwork and importer orders once the goods have been shipped. The sending financial institution sends the receiving financial institution documents and payment instructions.

The buyer receives this once the payment has been sent from the paying bank to the issuing bank. The final step is for the sending bank to transfer the funds to the exporter.

  • Pros

This alternative to Letters of Credit as an export payment option is more cost-effective.

  • Cons

In this case, the importer is not checked. Because the importer’s bank has not guaranteed payment, the business is vulnerable to product returns and cancellations.

5. Consignments

Consignment is a type of open account used in international trade. Payment is given to the exporter only after the overseas or third-party distribution company sells the goods to the ultimate client. The exporter retains title to the products during the consignment period, and the foreign distributor is responsible for the commodities’ receipt, management, and sale to third parties.

  • Pros

The costs of warehousing and managing goods are reduced, making this strategy more competitive.

  • Cons

After a transaction, the exporter has no assurance of being paid and no control over how the goods are handled.

Which export payment method is best, and why?

Here are some aspects to think about when selecting a payment option for international trade:

1. The availability and requirements of cash flow

It is essential to think about the importer’s financial situation and availability. Find out, for instance, if payment may be made immediately or if more time is required.

2. The target country’s laws and import/export policies

Think about the importer’s country’s international trading conditions, such as import permits, subsidies, tariffs, quotas, etc.

3. The type of product

Is there much demand for this item in the country that will be importing it? If so, the purchaser may be open to other payment conditions.

4. The reliability of both the exporter and the importer

The partnership’s success is at risk if either the exporter or the importer has a low credit rating. If you want to do business successfully, you must know that you can trust both parties.

5. Products and services offered by rival businesses

Do your homework and find out your competitors’ export payment options.

Author
Author

Mehul Goyal is one of the top EPCG License - DGFT Consultants in Delhi NCR with an expertise in all kinds of DGFT licenses.