Worldwide Payment Methods for Imports and Exports

International Payment Options

Five Primary International Payment Methods

During or before contract negotiations, buyers and sellers should consider which of the following international payment methods for imports and exports is mutually desirable for both parties.

Consignment

A variation for imports and exports in which payment is only made after the products have been sold to the end customer by the overseas distributor is an international payment method called ‘consignment’. Under the contractual arrangement, the overseas distributor receives, manages, and sells the products for the exporter, which retains title to the goods until they are sold to the end customer. This is without a doubt one of the highest-risk international payment methods for the supplier, as there is no guarantee of payment and the products are in an overseas location under the control of an independent distributor or agent. The consignment payment method does assist the supplier in becoming more competitive due to better stock availability, reduced storage, and lower inventory costs. The success of the consignment payment method is highly dependent on the compliance of the third-party distributor.

Advantages

• The buyer only makes a payment after the final sale of the goods to the end consumer.
• The seller has lower storage fees and less inventory management.

Disadvantages

• The seller lacks access to the inventory.
• The payment to the seller is not guaranteed until the final sale. 

Open Account

When using the open account payment option, the goods are sent and delivered before any money is received; payments are then usually due 30, 60, or 90 days after the date of shipment. It is one of the most common international payment methods for imports and exports, and many large corporations will only buy on an open account. This is a very advantageous international payment method for the buyer in terms of cash flow and cost, but it is also one of the highest-risk options for the seller.

Many businesses have been successful in negotiating open account payment arrangements because of the heightened competitiveness within export markets. Sellers giving businesses credit have contributed to this, which is a result of exporters trying to prevent their businesses from moving to rivals who offer longer credit terms. Many exporters can use one or more trade financing strategies, such as a standby letter of credit or export credit insurance, to offer competitive open account terms while reducing the risk of non-payment.

 Advantages

• The buyer can negotiate advantageous credit terms and improve cash flow.
• An open account option is an international payment method for imports and exports that is beneficial for both the buyer and the seller if they already have established business and a trusting relationship.
• The seller can use the open account payment method to maintain sales and attract new customers in the competitive market.

Disadvantages

• The open account payment method can involve high risk for the seller.
  

Documentary Collections

Documentary collection provides more protection for the seller than open account delivery since it stops the buyer from taking possession of the goods before making an international payment or accepting a bill of exchange. When a seller is reluctant to give goods on an open account basis and needs the extra protection that a documentary credit offers, therefore, documentary collections are frequently used as one of the international payment methods for imports and exports.

For the international trade payment to be completed, the buyer and seller must both involve their respective banks. The collecting bank acts on behalf of the buyer, whereas the remitting bank represents the seller. When the products are shipped, the seller prepares the required documentation (bill of lading, insurance certificate, certificate of origin, etc.) in accordance with the agreed-upon Incoterms 2020 and sends the documentation to the remitting bank with the collection order. Following that, payment instructions and the documents are forwarded from the remitting bank to the collecting bank. The buyer makes the international payment or acceptance to obtain the necessary documents to take ownership and to enable import clearance of the products. The remitting bank receives the collected amount and credits the seller with the funds.

Documents against payments and documents against acceptance are the two types of documentary collections.

Documents Against Payments

The presenting bank (the buyer's bank) is authorised to give the documents to the buyer under the terms of Documents Against Payments, but only in exchange for prompt international payment. The collection order must include the exact date by which the buyer must pick up the documents or fulfil any "other conditions," as per the Uniform Rules for Collection.

Documents Against Acceptance

Under the terms of Documents Against Acceptance, the buyer receives the documents from the presenting bank only if they accept a bill of exchange, which often matures on a prearranged date (time bill) or 30–180 days after presentation (after-sight bill). Through this procedure, the buyer might receive the goods before making the international payment.

Advantages

• Out of the international payment methods for imports and exports, this is more economical than using a letter of credit.
• The seller holds the title to the goods until international payment is made.

Disadvantages

• There is no commitment from the buyer's bank to pay the seller.
• The role of the banks is limited, and they do not guarantee international payment.
• Under this international payment method, there is no protection for the seller against cancellations of products by the buyer.
• There is a possibility of the seller having to pay for the return transportation of the product if the buyer refuses or is unable to pay.
  

Letter of Credit

A letter of credit is a guarantee of international payment from the buyer's bank that states the seller will receive the agreed-upon amount if they adhere to the terms, conditions, and documentation requirements outlined in the letter of credit. A letter of credit, which is sometimes shortened to simply L/C, provides the seller with assurance and authority over the buyer's payment for the goods they have delivered. In addition, the letter of credit serves as a promise from the bank on behalf of the buyer that the seller will receive international payment, subject to the fulfilment of all terms and conditions outlined in the L/C and the presentation and verification of the necessary documentation. For this service to be provided, the buyer must establish credit and pay their bank. Because there is no international payment obligation until the products have been dispatched in compliance with the contract, a letter of credit also provides protection for the buyer.

The main types of letters of credit for imports and exports are irrevocable, revocable, standby, transferable, confirmed, unconfirmed, payment at sight, deferred payment, red clause, and back-to-back.

The issuing bank will forward the letter of credit to the advising bank following the buyer and seller's agreement on the terms of the agreement and the use of a letter of credit in the seller's favour. In addition to delivering the necessary documents to the advising and confirmation bank, the seller will start the shipping procedure. After that, the documentation is delivered to the issuing bank, which verifies the documents and requests international payment from the buyer. Once payment is made, the buyer will receive the documents to enable them to take possession of the products.

Advantages

• The seller is reassured that by providing documents in good order and within an agreed timeframe, they will receive their money in full and on time.
• A letter of credit is one of the most secure international payment methods for exporters if they meet all the terms and conditions.
• When the buyer uses a letter of credit, they get a guarantee that the seller will honour the contract and provide documentary proof of this.

Disadvantages

• Using letters of credit can occasionally cause delays and other administrative problems.
• There are additional costs involved in using letters of credit, as the banks make charges for providing them; therefore, the buyer should weigh up the costs against the security benefits.
• The seller will only receive international payment if they keep to the strict terms of the letter of credit and supply exactly what they are contracted to supply. 
  

Cash In Advance

An international payment method for imports and exports known as "cash in advance" mandates that the buyer provide the seller with the international payment before the buyer receives the cargo, and often even before the shipment is made. When entering high-risk international trade relationships or export markets, cash in advance is often employed. Additionally, receiving international payments in advance carries very little risk for the seller and is less burdensome than a documented collection or letter of credit. On the other hand, the buyer finds this one of the most unappealing international payment methods, as they must pay in advance of receiving the goods.  The seller should consider using the cash in advance method if the buyer is a new client or if there are questions or concerns about the buyer's creditworthiness.

Advantages

• The supplier is reassured of payment.
• Cash in advance provides working capital for the supplier to process the order.
• Cash in advance is a very simple international payment method for imports and exports.

Disadvantages

• Cash in advance is the riskiest way for the buyer to do business, as they have paid upfront but have no guarantee the supplier will deliver the goods.
• The cash flow of the buyer is impacted while waiting for delivery of the products.
• Risks are almost completely placed on the buyer.
  

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