Exporting internationally can be a great way for companies to establish themselves on the global stage. But many businesses, especially SMEs, can often feel like the risks outweigh the rewards. A primary concern for those trading globally is how they will get paid, and if payment will be delivered securely on time.
Below are the various payment methods available to businesses and an estimated security ranking for exporter, customer and both parties together:
Using this method of payment, the customer receives the goods and then pays for them afterwards. Credit terms are often attached, usually of 30,60 or 90 days.
Security for exporters: 1/5
Security for customers: 4/5
Security for both parties: 2.5/5
This method is risky for exporters, as they won’t receive payment for a long period of time. However, customers are highly attracted to secure purchases and this can ultimately draw in more trade for exporters.
More secure than an open account, but still not free of risk, Bank Collection allows your bank to collect money on your behalf. An instruction document is forwarded by your bank to your customer’s bank for release against either Payment (Documents against Payment) or Acceptance – of a Bill of Exchange (Documents against Acceptance).
Security for exporters: 3/5
Security for customers: 3/5
Security for both parties: 3/5
Bank Collections are a ‘half-way-house’ for both parties in terms of security, making them one of the fairest payment methods for all involved. They don’t require lots of documentation, but this does reduce overall security of payment.
Letter of Credit
A letter of Credit is one Bank’s promise to the customer’s bank that they have trust in the exporter and will act as a guarantor in the transaction. For a Letter of Credit to be valid, both banks must agree on the letter and its terms.
Security for exporters: 4/5
Security for customers: 3.5/5
Security for both parties: 4/5
By involving a third party, a Letter of Credit creates baseline trust which can ensure security across international payments. The downside to Letters of Credit is that they require lots of documentation that must be meticulously completed, so they can be quite time consuming to complete.
This payment method favours exporters as the customer pays up front for goods before receiving them. This method of payment is most common for consumer goods purchased via e-commerce channels, when customers are often charged at point of goods dispatch.
Security for exporters: 5/5
Security for customers: 1/5
Security for both parties: 2/5
Unless it is a low value business to consumer transaction, this method of payment offers little to no security for customers and therefore exporters might be less likely to use this option as it deters potential custom.
How should businesses choose
Methods of Payment can vary in usefulness from situation to situation, and naturally the self-interest of both exporters and customers might affect which payment method is more popular in any given transaction. However, it is advisable to think of longer-term business relationships when exporting and keeping customers happy is a sure way to lead to repeat business transactions.
The main take away is that exporters should not only consider what is best for them, but what will establish them as a reputable business partner with their customers – payment methods such as Bank Collection and Letters of Credit can help exporters meet this goal.
To understand more about payment methods you can attend Greater Manchester Chamber’s next International Trade Forum ‘Brexit Uncertainty: Risk and Planning for 2019’ – if you are interested book here.