In international trade, Payment method is the way that a buyer chooses to pay the seller for goods or services. There are actually a number of option to choose from which a buyer and a seller mutually agreed upon. These options also offer various payment risk concerns to both buyer and seller. Since one is less secure than other and vice versa. For the exporters, to succeed in today’s global marketplace and win sales against global competitors, they must offer their customers attractive sales termssupported by the appropriate payment methods. On the other hand, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer. Because getting paid in full and on time is the ultimate goal for each export sale, payment methods in export are very important.
There are a number of payment methods for circulation in the export trade. Most of the case, it depends on the type of the export trade, the customer’s economic position, proposal and mutual trust between the seller and the buyer.
What Are the Different Methods of Payment?
Cash in Advance: With cash-in-advance payment terms, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, because it creates unfavorable cash flow for them. It also offers the maximum risk concern for buyer as the goods are still in the hand of exporter in a different country.
Letter of Credit (LC): Letters of credit (LC) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised.
Documentary Collections: A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents.
Open Account: An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter.
Consignment: Consignment in international trade is a variation of open account in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. Exporting on consignment is very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of an independent distributor or agent.
Which Payment Method Is Best for Exporter?
In case of cash in advance, exporters can avoid credit risk because payment is received before the ownership of the goods is transferred. Exporters remain in the safest zone of transaction while importers are not. On the other side, payment in letter of credit (L/C) would be a perfect choice for both parties as both parties remain in same risk zone. Selection of methods of payment basically depends on the trust building factor between exporter and importers.
As an exporter, ideally you would choose cash in advance for payments. But when you are dealing with a new buyer, it would be unwise to ask cash in advance as your payment term. Because the buyer might not agree such terms in their first trade with you. In that case, it will be handy for both exporter and importer to use letter of credit (L/C) payment method. This method is globally practiced in international business.
Cash in advance and letter of credit methods are commonly used for general export in Bangladesh. However documentary collection, consignment and open account are also used for specialized export. Risk becomes a common factor in the process of payment. Analyzing the risk factors, the best method of payment can be chosen from both sides; importers and exporters. Perfect scenario is to start trading with letter of credit. As it offers the second most secure instruments available to international traders. As the relation between a buyer and a seller grows over time, cash in advance can also be chosen for payment.
Methods of Payment (2018, July 12). Retrieved from https://www.export.gov
Payment for export transaction (2018, July 12). Retrieved from https://www.mastercardbiz.com