When it comes to cross-border payments, it becomes challenging for an exporter or importer to sell or buy perishable goods from the international markets. So, it's advisable for both parties to use the accurate payment methods to make the payment to the buyer on time. This helps you establish a strong relationship with the buyer, making it easier to go for fair negotiations for your upcoming export.
There are several reasons that a customer might refuse to make a payment, such as political change, economic shift, the relationship with their designated banks, or the market business culture. You must know the importance of these factors and understand the payment method in global trade.
The five terms of payment in export are as follows:
1. Cash In Advance: As per the cash in advance payment terms, exporters can avoid credit risk by receiving payment before transferring ownership of the perishable goods. But the buyer doesn't want to pay the cash in advance, as it will affect the cash flow, and they are concerned about whether their goods will be shipped or not. Exporters who follow this payment method to run their business might receive fewer orders and lose their customers because of the strict payment policy.
2. Letters of Credit : On behalf of the buyer and the seller, a letter of credit guarantees payment from one bank to another. The buyer’s bank gives a written commitment to the seller known as a letter of credit and assures the exporter that the payment will be done as per the agreed terms and conditions outlined in the document. A Letter of Credit (LC) in comes useful when the exporter cannot easily verify the buyer's credit but trusts the buyer's foreign bank. An LC also protects the buyer, as the buyer can make the payment after the goods are shipped.
3. Documentary Collection: In terms of documentary collection, both parties' banks get involved to complete the transaction process. Once the exporter ships the goods, they must submit the shipping documents and a collection order to the remitting bank. The bank then sends these to the collecting bank, along with instructions for the collection. The remitting bank then sends these documents outlining the payment instructions to the collecting bank, which forwards them to the buyer. Once the payment is done by the buyer, the collecting bank transfers the funds to the exporter’s bank, and the exporter finally receives the payment from the remitting bank.
The documentary collection consists of two types:
- Document Against Payment (D/P): Under the Document Against Payment, the buyer needs to make the payment due at sight. The buyer is required to make the payment before the documents are released by the collecting bank.
- Documents Against Acceptance: In the Document Against Acceptance arrangement, the buyer should pay the amount after a specified time. In this case, the buyer accepts the time draft and agrees to pay. Following this, the bank releases the documents to the buyer.
4. Open Account: An open account allows you to sell perishable goods in global trade with payment due at a later date. The buyer and seller can negotiate the time of the payment, which can be about a week, a month, or two or three months. This payment is not a safe option for the seller, as they had to bear the responsibility for the non-payment of the goods. In most cases, the seller will buy export credit insurance to cover the risk of non-payment of the perishable goods.
5. Consignment: The consignment method in international trade involves an open account in which payment is sent to the exporter after the goods have been sold by the foreign distributor to the end customer. This payment can pose a risk to the exporter, as there is no payment guarantee, and moreover, the goods are in the custody of a foreign distributor. Working with a reliable foreign distributor or third-party logistics provider can reduce your storage and inventory costs. An insurance policy should be in place to cover the perishable goods during transit or while with a foreign distributor, providing protection against the risk of non-payment.
What are the factors needed to consider to choose the best payment method in international trade?
When it comes to choosing payment methods in global trade, you need to collect the right data and information about the buyers and their financial stability. Following this process, exporters can do groundwork research on the international customers, including their market business culture and banking arrangements. It doesn't matter how the exporter manages international transactions; all official documents, from letters of credit to customs and excise documentation, must be accurate and include all the required details. Incorrect or incomplete information can delay your shipment process, causing major repercussions to your business.
How to Streamline the payment methods in international trade?
Choosing the right payment method in export operations is the key to the success of smooth international trade transactions. Each method offers its own pros and cons, catering to the specific needs and preferences of both exporters and importers. Whether the shipping payments are done through an open account, a secure letter of credit, or a distributor-dependent consignment, proper evaluation and negotiation are essential. By understanding the meaning of each payment term and considering factors such as trust, risk tolerance, and financial stability, exporters can come up with an informative decision-making strategy to ensure profitable trade agreements.
At Citrus Freight , we focus on transparency and communication and adhere to the agreed terms to establish strong relationships and enhance seamless transactions across borders. With the right approach, exporters can handle payment processes easily and open doors to long-term growth opportunities.