Forex
Ultimate Guide: Different international business payment methods
With each passing year, the business competition seems to only be growing.
Export import business, in particular, that need easy access to international business payment methods, has been built on the very foundation of timely transfers, timely payment to vendors, and trusted delivery.
But there is more than 1 way of going about the financial aspect of globalized business. In this blog post, we talk about the different international business payment methods available.
Engaging in cross-border trade can be overwhelming for some business owners, leading them to avoid international markets altogether.
Cash-in-advance under international business payment methods
With cash-in-advance payment terms, exporters can mitigate credit risks as they receive payment before transferring ownership of the goods.
The cash-in-advance payment method offers exporters the highest level of security, as they receive payment before shipping the goods and transferring ownership.
Typically, wire transfers or credit cards are used for such payments. However, this option is unfavorable for importers, as it poses a risk of non-delivery.
Exporters who solely rely on cash-in-advance payments may struggle to maintain competitiveness, as importers prefer more flexible payment terms.
Pros for Buyer:
Reduced Risk: Cash in advance ensures that the buyer is not exposed to credit risk, as payment is made before the goods are shipped.
Control over Costs: By paying in advance, the buyer has better control over their costs since they know the exact amount they need to pay before receiving the goods.
Cons for Buyer:
Cash Flow Impact: The buyer needs to allocate funds upfront, which may restrict their available capital for other expenses.
Trust and Non-Delivery Risk: There is a level of trust required, as the buyer relies on the exporter to fulfill their part of the transaction.
Limited Bargaining Power: When paying in advance, the buyer may have limited bargaining power in negotiating other terms of the transaction, such as pricing.
Potential Supplier Limitations: Some suppliers may not offer cash in advance as a payment option, which could limit the buyer's choices in terms of available products or suppliers.
Pros for Seller:
Payment Security: Cash in advance ensures that the seller receives payment before shipping the goods.
Reduced Credit Risk: By receiving payment upfront, the seller avoids the credit risk that comes with extending credit to buyers.
Improved Cash Flow: Cash in advance enables the seller to have immediate access to funds, which can help improve cash flow.
Simplified Transaction Process: With cash in advance, the seller can simplify the transaction process as they do not deal with complex credit checks or collections.
Cons for Seller:
Competitive Disadvantage: Demanding cash in advance as the sole payment method may put the seller at a competitive disadvantage.
Limited Market Reach: Some buyers may be unwilling or unable to make upfront payments, limiting the seller's market reach.
Trust and Relationship Building: Requiring cash in advance may strain trust and hinder relationship building with buyers.
Returns and Refunds: If the buyer faces issues with the goods after making payment, r refunds can be more complex when the payment has already been received by the seller.
Letters of credit under international business payment methods
A letter of credit serves as a commitment from a bank, acting on behalf of the buyer, to ensure payment to the exporter.
However, this payment is dependent upon the terms and conditions outlined in the LC, which are verified by all necessary documents.
- Letters of credit are commonly used when the importer has not established credit with the exporter. However, if the exporter has confidence in the importer's bank, they may opt for this payment method.
- The contract between the exporter and importer is negotiated and confirmed.
- The issuing bank establishes the documentary credit and notifies the exporter’s bank. Post this stage, the goods are shipped by the exporter.
- The exporter provides documents verifying the shipment and compliance.
- The bank verifies the documents to facilitate international business payments.
Pros of Letter of Credit for Buyer:
Payment Security: A letter of credit provides a high level of payment security for the buyer. The issuing bank guarantees that payment will be made to the exporter.
Risk Mitigation: The letter of credit reduces the risk of non-delivery or non-compliance by requiring the exporter to provide documents.
Established Credit Relationship: When the buyer does not have a credit relationship with the exporter, a letter of credit enables the buyer to build trust with the exporter with the creditworthiness of their bank.
Cons of Letter of Credit for Buyer:
Administrative Complexity: The process of setting up and managing a letter of credit involves administrative work.
Cost: Letters of credit often involve fees, including issuance fees, and confirmation fees.
Limited Flexibility: The terms and conditions specified in the letter of credit are rigid and may not allow for adjustments.
Potential Delays: The process of document verification and payment under a letter of credit can introduce delays in receiving the goods. If there are discrepancies it may result in delays in the release of payment and the goods.
Pros of Letter of Credit for Seller:
Payment Security: A letter of credit provides a high level of payment security for the seller.
Risk Mitigation: The letter of credit reduces the risk of non-delivery or non-compliance.
Access to New Markets: It allows sellers to reach buyers in foreign markets where creditworthiness or trust may be a concern.
Financing Opportunities: In some cases, the seller can present the letter of credit to obtain financing. This can provide working capital or liquidity while awaiting payment.
Make Note: There is a risk for the exporter/seller if the bank fails to make the payment as promised. In such cases, the seller may have limited recourse to recover the funds in the event of non-payment by the bank.
Documentary collections under international business payment methods
A documentary collection (D/C) is a payment type where the exporter trusts the collection of payment for a sale to their bank (remitting bank).
While banks act as intermediaries in the process, documentary collections do not involve a verification process. Compared to letters of credit (LCs), documentary collections are considered more cost-effective.
Documents Against Payment
The document against payment (D/P) transaction involves the exporter providing the asset documents to their bank. Once the payment is received, the bank presents these documents to the importer. Subsequently, the importer can use the documents to take over their assets.
But, there is a risk for the exporter.
There is a huge possibility that the importer may refuse to make the payment. In such cases, the exporter has limited recourse to recollect the payment.
Documents Against Acceptance
In a Document Against Acceptance (D/A) transaction, the exporter's bank shows the way and provides instructions to the importer's bank. This comes along with a request to release transaction documents to the importer.
Following this, the goods are delivered to the buyer, who then pays for the specified amount.
Pros of Documentary Collection for Buyer:
Cost-Effective: The documentary collection is a more cost-effective payment method than letters of credit.
Control Over Payment: With the documentary collection, the buyer has control over the payment process. The buyer can decide when and under what conditions the payment will be made.
Cons of Documentary Collection for Buyer:
Limited Alternatives under Non-Compliance: If the seller fails to meet the agreed-upon terms the buyer may have limited options for recovering payment.
Reliance on Seller's Cooperation: Documentary collection relies on the cooperation and trustworthiness of the seller. If the seller delays or fails to provide the documents, it may cause unnecessary delays.
Risks of Non-Delivery or Substandard Goods: Documentary collection does not provide assurances regarding the quality or condition of the goods.
Pros of Documentary Collection for Seller:
Flexibility in Payment Terms: With the documentary collection, the seller has the flexibility to negotiate payment terms with the buyer.
Simplified Process: Documentary collection involves a relatively straightforward process. It does not require extensive document preparation or the involvement of multiple parties.
Cons of Documentary Collection for Seller:
Limited Control over Payment: Unlike cash in advance or letters of credit, the documentary collection provides limited control over payment. The seller relies on the buyer's willingness to make timely payments.
Risk of Non-Payment: In a documentary collection, there is a risk that the buyer may refuse or delay payment.
Incomplete or Non-Conforming Documents: Any discrepancies or incomplete documentation may result in delays or non-payment by the buyer.
Open account under international business payment methods
An open account transaction is a sales arrangement. Goods are shipped and delivered to the buyer before payment is due. Usually, the time frame is between 30 to 90 days.
However, it has higher risks for the exporter. In the competitive export market, foreign buyers often request open account terms as it is more common for sellers to extend credit internationally.
Importers find open accounts highly advantageous as they can receive the goods upfront while deferring payment. This naturally provides them with better cash flow management.
However, the risk of non-payment or late payment will potentially stretch the exporter’s working capital.
Potential Risk of Non-Payment: Buyers assume the risk of delayed or non-payment when using open account terms. If financial difficulties arise or disputes occur, the buyer may face challenges in meeting the payment obligations within the agreed timeframe.
Limited Control over Goods: With open account terms, buyers receive the goods or services before making payment. This means they have limited control or leverage over the quality, condition, or timely delivery of the goods. If any issues arise, it may be more challenging for the buyer to address them effectively.
Dependency on Seller's Creditworthiness: Buyers need to trust that the seller is financially stable and reliable. If the seller experiences financial difficulties or fails to deliver as per the agreed terms, the buyer may face disruptions to their business operations or incur losses.
Consignment under international business payment methods
So, there’s a twist on the open account concept: In this version, the exporter gets paid only after the goods are sold by the foreign distributor. However, the exporter still owns the goods until they're sold.
Now, consignment is a game-changer for exporters. It not only makes them more competitive but also cuts down on the costs of storing and handling inventory.
But here's the secret to making it work like a charm: team up with a reliable foreign distributor you can trust. That's the key to exporting on consignment and making it a roaring success.
Pros of Consignment for Seller:
Market Expansion: Consignment allows sellers to reach new markets and customers without the need for upfront investment. By placing goods on consignment, sellers can tap into the distribution networks.
Inventory Management: Consignment helps sellers reduce their inventory holding costs.
Reduced Financial Risk: It reduces the financial risk associated with unsold inventory and ensures a more predictable revenue flow.
Cons of Consignment for Seller:
Limited Control: Sellers have limited control over the pricing and marketing of consigned goods. The consignment partner is responsible for selling the goods.
Delayed Revenue: Consignment transactions involve longer payment cycles.
Risk of Unsold Inventory: There is a risk that consigned goods may not be sold within a limited time. Sellers bear the risk of holding unsold inventory, which can tie up resources and lead to potential losses.
Final Thoughts
When it comes to international business payment methods for international trade, research thoroughly.
Businesses have a wide range of choices that can ensure both parties involved in a transaction are satisfied. Familiarising yourself with different common payment methods can greatly contribute to achieving this goal.
Choose wisely. Choose well.
Karbon offers business accounts tailored to the needs of companies engaged in international business. These include
- A multi-currency business account based in India.
- FX services with competitive exchange rates, including spot and forward contracts.
The views expressed in the blogs on this page are solely the opinions of the authors and do not constitute expert advice. While we strive to provide accurate and up-to-date information, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk. We disclaim any liability for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this website.
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