When exporting overseas, the risk of not getting paid can increase. It can also affect your company's cashflow, as you may face initial expenses and longer payment terms with overseas companies. Exporters and importers need to be aware of the different methods of payment they can use to ensure they receive the payments for goods on time.
Below are the five main methods of payment used in international trade:
- Advance payment: With advance payment terms, the exporters avoid credit risk because payment will be received before the ownership of the goods is transferred. However, this is the least attractive option for the importer as it will create cashflow problems and the goods might not be sent if payment is made in advance.
- Open account: This is the most common payment method and is the most advantageous option for the importer but the highest risk option for the exporter. An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually between 30 to 90 days. The exporter can be reluctant to extend credit but can mitigate the risk of non-payment by protecting themselves and using products such as export credit insurance.
- Bills of exchange: A BoE is an unconditional order in writing that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. There are up to three parties involved, the payee, the drawer and the third-party payee. BoE do not pay interest, they may do if not paid by a certain date, in which case the rate must be specified previously.
- Documentary collection: A D/C is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank, the exporter’s bank, which sends documents to a collecting bank, the importer’s bank, along with instructions of payment. The payment can either be at sight, documents against payment, or at terms, documents against acceptance. The D/C usually involves a BoE.
- Letters of Credit: LCs are one of the most secure method available to companies trading internationally. It is a written undertaking given by a bank on behalf of the importer to pay the exporter an amount of money within a specified time provided the exporter presents documents which conform to the terms laid down in the Letter of Credit. With over 75% of first presentations to banks against letters of credit being rejected, resulting in delayed payments and additional costs for exporters, this method results in high bank charges and can be complex to administer.
Join us on a course to explore these options and reduce your costs. Our next Methods of Payment including Letters of Credit will take place on 28th February from 9:30am to 4:30pm in our offices at Elliot House, 151 Deansgate, M3 3WD. It is £225+VAT for members to attend and £295+VAT for non-members.
Foreign Exchange also need to be considered when dealing with international transactions. Our new FX service in partnership with AFEX can help you with protecting against the volatile exchange rate.
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