When dealing in international trade there are several ways that you can receive payment from your foreign buyers. The method that you choose to use is dependent on your company’s financial abilities, how trustworthy your buyers are and your products position in the countries that you want to sell to. There are five common methods of payment that may be used when making a deal internationally. These payment methods are cash in advance, letters of credit, documentary collections, open accounts, and consignment.
Cash in advance is the most secure and most ideal form of payment because you receive payment by cash (paid by wire transfer) prior to the shipment being sent to the buyer.
Letters of credit are the most versatile and secure form of payment available in international trade and are commonly used to protect the interests of both the buyer and seller. When a letter of credit is issued, the exporter receives a commitment of payment from the bank on behalf of the foreign buyer provided the terms and conditions stated in the letter of credit have been met.
The third most secure form of payment is documentary collection where the exporter entrusts their bank with the collection of the payment for a sale. This type of transaction requires the foreign buyer to pay the specified amount either at sight of documentation or on a specified date. While banks may facilitate the transaction, there is no verification process and there is limited recourse for nonpayment.
While less secure, an open account is a convenient method of payment if the buyer has good credit. The exporter bills the buyer who is expected to pay at a future date based on agreed upon terms after the goods have been sold. Risks include delayed payment, difficulties pursuing legal enforcement, and receivables are harder to finance.
The riskiest payment method is consignment because the exporter is not guaranteed payment and the product is overseas with an independent agent or distributor. A contractual arrangement is made where the foreign distributor receives, manages, and sells the goods for the exporter. The benefit of consignment is that it can help exporters become more competitive because of better availability and faster delivery and reduce direct costs for managing and storing inventory.
