To be successful in today's global marketplace and prevail over foreign competitors, exporters must offer their customers attractive terms of sale supported by appropriate payment terms. Since the ultimate goal of any export transaction is to be paid in full and on time, an appropriate payment method must be carefully selected to minimize payment risk while meeting the buyer's needs. As shown in Figure (a), there are four main payment methods for international transactions. During or before contract negotiations, you should consider which of the methods shown in the figure is best for you and your customer. Four main methods that are opted by importer and exporter groups are:
Open account
Open account
Bank collection
Bank collection
Letter of credit
Letter of credit
Advanced payment
Advanced payment
(a) safest payment method in export and import
OPEN ACCOUNT
This is probably the least secure payment method for you as an exporter. Your buyer receives the goods and then pays for them, usually with a payment term (30, 60 or 90 days).
This payment method extends the period before your company receives cash - and your working capital position is further impacted when a payment term applies. You might consider this option in the following circumstances:
You have an established relationship with the buyer
You have an established relationship with the buyer
The buyer is a multinational company with strong buying power and high buyer confidence
The buyer is a multinational company with strong buying power and high buyer confidence
Smaller value exports.
Smaller value exports.
BANK COLLECTION
This is a safer option than a current account where, as the name suggests, your bank collects the money on your behalf. It is also known as a documentary collection.
An instruction document is forwarded by your bank to your buyer's bank for release against either payment (documents against payment) or acceptance of a draft (documents against acceptance).
This can be a good way to "meet in the middle" with your buyer, reducing (but not eliminating) risk for both of you.
It is also not as time-consuming or costly as a letter of credit and does not use up a line of credit.
LETTER OF CREDIT
A letter of credit also called a documentary letter of credit, is a contractual agreement under which the opening bank (the importer's bank) promises payment to the beneficiary or exporter on behalf of the customer (the importer or buyer) against the receipt of complying stipulated documents.
In LC the bank guarantees timely and full payment to the seller. If the Buyer is unable to make such payment, the Bank shall assume all or the remaining amount on behalf of the Buyer.
ADVANCED PAYMENT
This is the most advantageous method for you as an exporter because the buyer has to pay for the goods before he receives them. Consumers do this basically every day when they buy/purchase online, with the amount being collected either when the order is placed or when the goods are shipped.
This method is advisable in the following cases:
You have a new relationship with the buyer where there is a "trust deficit" between the buyer and seller
You have a new relationship with the buyer where there is a "trust deficit" between the buyer and seller
The buyer does not have a good credit rating
The buyer does not have a good credit rating
You are selling a unique/rare product of high value.
You are selling a unique/rare product of high value.
If you have followed the action plan and path to export outlined here, you will know exactly why you are exporting and what your goals are for your business in this regard. You will have identified the potential barriers to winning and developed some strategies to cover risk areas for you. You will also have quoted a price that will bring the profit you are seeking.
So, once you have selected the appropriate payment method, be sure to take enough time to get everything in place and be sure to ask questions - to your buyer, if necessary, and especially to your bank for assistance.
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