What do you find to be the most rewarding and frustrating aspects of being an exporter? Of course, many people are concerned about receiving payments on time and in the correct amount.
Seeing that US exports increased by $3.4 billion or 1.5% in the past months to 228.1 billion as of December 2021, it's safe to say there's a lot more money to be made in the shipping sector. As a result, it’s beneficial to research and implement the following international trade payment methods in order to better understand the payment process (and thus profit sooner!).
But first, the basics.
A Well-Written Agreement
A well-written contract, such as a proforma invoice or sales contract, will help both parties avoid misunderstandings. To avoid surprises down the line, it should explicitly state crucial information such as the desired mode of payment, goods descriptions, pricing and delivery information, Incoterms, and other facts.
International Trade Payment Methods
Exporters must now, more than ever, provide their clients attractive sales conditions backed by proper payment options. From the riskiest to the least difficult for the exporter, here are the five most common payment options:
1.Open Account (O/A)
An open account transaction is when items are transported and supplied before getting paid for, usually within 30, 60, or 90 days. For exporters, open accounts are dangerous; yet, from the customer’s point of view, in terms of costs and risks, this is the ideal way of payment.
2.Consignment
Consignment is a type of open account where payment is made to the supplier after the items have been sold to the end consumer by the overseas distributor. It is the riskiest among the popular payment options.
3.Collection
This type of payment, also known as a documentary collection, entails using bank services for more than just processing the cash flow for your payment. In a documentary collection, you entrust your product to the bank until you receive payment.
4.Cash in Advance
Because payment is received before the transfer of ownership of the products, the exporter may avoid the risk of non-payment or credit risk with cash in advance. The most prevalent cash-in-advance alternatives offered to exporters are wire transfers and credit cards. You'll get paid upfront with this choice, and you'll be able to use your client's money to fund the production of the product you're selling.
5.Letter of Credit
International letters of credit are assurances from a bank on behalf of an overseas buyer that payment will be given to the beneficiary (exporter) if the terms and conditions are followed, as demonstrated by the presentation of certain documents. Therefore, it is one of the safest payment methods for an exporter.
Let EXIMA Help You
EXIMA’s ultimate goal is to provide our users with all the knowledge we have on international trade. For more trading information, make sure to check out our other articles here!