Payment Methods in International Trade

In export/import, credit risk is a major barrier holding business owners worldwide from stepping into the international market. In this blog, we are going to introduce you to different payment methods that will help you in a better understanding of international transactions.

Let's get started with the simplest and oldest payment method which is a 'direct payment'. One way to export your goods is to take 'advance payment' from the buyer. It is based on mutual understanding and trust that once the payment is received the buyer will get the goods. It is best for the exporter but risky for the buyer. Another way is 'Open account payment' where the buyer will transfer the money in the open account once goods are delivered. The exporter will have to take care of all the risks and it is advantageous for the buyer. Both of them are high risk for either party, so let's move to more secure payment methods.

Bills payment method is a little complex but a more secure method of payment. Here the exporter entrusts the handling of commercial documents to banks and gives the banks necessary instructions concerning the release of these documents to the Importer. It is considered to be one of the cost-effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system. In this case, documents are released to the exporter once the payment is done.

The last and most widely used method is 'Letter of Credit (L/C)'. It is a written undertaking by the importer’s bank, known as the issuing bank, on behalf of its customer. In it, the importer (applicant), promises to effect payment in favor of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. An L/C involves the exporter, the importer, banks of both parties and the government of both countries, hence, making it the most reliable and secure method of payment.

Once payment is received your export transaction is done and you can start working on your next order. Ximpex makes sure that you understand the export market in a simple manner and helps you in building the best strategies for your business.

Author: Sachin Yadav Co-Author: Lisa Goel

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