Short handbook of international methods of payment
As we already mentioned in a previous article, expanding your business internationally would certainly be a huge opportunity to grow your company’s income, but at the same time, the project would result in a quite complex operation.
It is a choice to make after thoroughly considering all of the legal and contractual aspects which may differ considerably from country to country.
To support and guide you in choosing the best conditions for your business, here is a list of the five primary methods of payment for international transactions which are verified and approved by ITA (International Trade Administration).
Cash-in-Advance
It occurs when a buyer (importer) issues the payment, in the agreed currency and means of payment, before the goods have been sent or even manufactured. Upon payment receipt, the seller (exporter) will be in charge of shipping the goods and all the related documentation to the buyer.Open Account
This payment method takes place when the seller dispatches the goods and all the relevant documentation directly to the buyer who undertakes to pay the bill at a future date (usually 30, 60 or 90 days).On Consignment
Consignment is a variation of open account in which the importer sends the payment to the exporter only after the goods have been fully sold by the foreign distributor to the end customer.Documentary Collection
A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment to its bank (remitting bank) which then sends all the transaction documents to the importer’s bank (collecting bank) containing all the instructions for the payment.Letter of Credit
It is the most secure instrument for international traders, and it is widely utilized among the USA, Canada, and EU because the whole transaction is carried out by banks on behalf of both the buyer and the seller. So the whole process is guaranteed and protected by financial institutions, and neither the importer nor the exporter has a direct role in it. More specifically, an L/C is issued by a bank at the buyer’s request in favor of the seller. Payment will be made to the exporter, provided that the product specifications and the buyer’s terms and conditions have been met. The exporter must send shipping documents (i.e. commercial invoice, transport document, certificate of origin, insurance, bill of lading or air waybill) to the bank which will check compliance with the letter of credit conditions. When the L/C is irrevocable, it’s extremely important that the seller gives detailed guidelines to the buyer regarding the conditions to set in the L/C text. The exporter/seller also has the possibility to ask for the importer’s bank confirmation of the L/C issuance.
Precautions to Take
Obviously, each one of these five methods can be risky for one part or the other.
The advice that we would like to give is to always keep in mind that entrusting a solid bank system is the only way to have the situation under control during the whole process and to reduce the risks for both parts.
Also, this list is only a primary classification: different methods can be combined with each other to minimize all the possible risks for all the actors involved.
Should you wish to learn more about this topic, feel free to contact our firm: we will offer any assistance we can.