Payment Methods in International Trade

Payment Methods in International Trade

If you would like to be permanent and successful in international trade then you need to learn payment methods very well.

Profit margins in a typical foreign trade transaction is limited due to high competition but risks are high.

One mistake could lead to your bankruptcy. 

Categorization of international payment methods: 

One of the most common international payment classification method is to put them in order by risk amounts for exporters or importers. Open account is the most risky payment method for exporters whereas cash in advance payment is the most secure one. On the other hand the reverse is true for importers. Open account is the most secure payment method for importers whereas cash in advance payment is the most risky one. documentary collections and letters of credit are balanced risk payment types for both exporters and importers.

International Payment Methods:

Open Account: Open account is a payment method in international trade where exporters first ship the goods to the importers and then they will be receiving the payment from the importers some time after the shipment. Exporters will receive their payment in most cases 30 days after bill of lading date or 60 days after bill of lading date.

This is the most risky payment type for the exporters because as soon as shipment completed exporters send all documents to the importers so that the control over the goods passes to the importers before payment initiated. Open account is the most frequently used payment method in international trade at the moment. 80% of all international business transactions are paid by open account terms.

Cash in Advance: Cash in advance is the opposite of open account. Exporters get their payments before they dispatch the goods to the importers. Cash in advance payment type is used in a very limited scale in international trade as it is not suitable for the importers who have the bargaining power in today’s global economy.

Documentary Collections: Also known as “Cash Against Documents”. Documentary collection is a good alternative to open account payment. Exporters ship the goods to the importers and then they collect the shipment documents and give them to their bank. Exporter bank sends the documents to the importers bank who gives the documents to the importers against payment or payment guarantee. Money will be send back to the exporter throughout the banks; from importer’s bank to exporter’s bank and finally from exporter’s bank to the exporter. If importers do not pay or accept to pay money for the documents , banks will not be held liable under documentary collections which makes this payment method weak in terms of risk issues.

Documentary Credits: Also known as “Letters of Credit”. Documentary credits are one step more secure payment methods than documentary collections as banks give the payment guarantee to the exporters. Documentary credits have two weaknesses. They are expensive and complicated. This payment option is suitable for medium to big amount transactions. Very limited professionals know the basics of letters of credit.

(Refer my next blog for detailed description of Letter of Credit )