To be able to lead today’s global marketplace, businesses need to offer flexibility in payments. Nonetheless, there are always risks involved when it comes to international trade. Both for importers and exporters, alike.
To better understand this let us take an example. Say an exporter sends goods to a client overseas. Unless the payments are received, the goods are a gift to the importer. On the other hand, if the importer pays advance to the exporters, they may risk losing the money and never receive the goods.
Establishing safe and secure payment options for both- importers and exporters is vital for global transactions.
In this article, we will be exploring some of the payment options available for businesses, including advance payment options.
Advance Payments
This one is strictly in favor of the exporters. As already mentioned, until the payments are received the exporters risk losing valuable goods.
In international trades, filing complaints and claiming compensation is not that easy. For starters, there are multiple intermediates in position. For example, the trade ministry of importing and exporting countries would need to be consulted before making a claim.
Usually, advance payments are made through cards or bank deposits. The most common ones being virtual cards, which can be easily used. Plus, they offer more security and reduce the chances of losing track of payments and the card itself.
Credit Letters
Commonly known as Letters of Credit, or LCs, are one of the most secure payment options. It secures the payments at both ends of a transaction.
An LC is a sort of commitment that a bank makes on the behalf of the buyer, or in this case, the importer. The bank would make the payments after the buyer acknowledges the receipt of the goods.
However, it is noteworthy that the buyer would have to deposit the payment amounts with the bank beforehand.
Documentary Collections
Generally speaking, there are several documents that the buyer and the seller need to exchange during international trade. These documents usually concern the ownership of the goods.
This brings us to another payment method used by several international traders. In simple terms, a documentary collection refers to the transfer of the documents involving mediators.
Notably, it is the bank that acts as a mediator during documentary collection transactions. The seller’s banks send the ownership documents to the buyer’s bank, along with instructions to release the documents on successful payments for the goods.
Open Account
Being one of the most popular credit payment systems, an open account is also one of the riskiest options. Usually, in international markets, the buyers may press sellers to send the goods before the payments are due.
The payments are usually made within 30-90 days of the credit period. Thus, ensuring a good relationship between the sellers and the buyers, which could last longer.
That being said, there are still possibilities of losing payments and goods for the sellers. In this case, the seller may also prefer to get export credit insurance to protect the losses.
Consignments
A different version of open account payments, where the seller receives the dues after the goods have been sold in the foreign market. Consignments are usually contractual transactions between the importer and the exporter.
However, it is evident that these payments involve a high risk of losing both goods and the money. Primarily, the sales would decide if the payments would be made or not. And likewise, if the exporter would earn any profits on the goods they send overseas.
That being said, consignments are usually preferred by brands that have a large distribution network in the importing country. This would ensure the goods are sold, and the payments are made in the end.
It is quite evident that all the aforementioned payments are usually preferred by large corporations. However, for small industries and businesses, there are plenty of other payment options too. For example, there are online payments, then there are mobile payments, and there are bank-to-bank transactions too.
The mode of payment to be chosen depends on the convenience of the seller and the buyer. Thus, making it all the more important for business owners to be a little agile with their payments. After all, what matters most is making sales and receiving payments. And if it could be done to ease out the options for the buyers, there’s nothing better than it.
On this note, we suggest you keep exploring more to understand which method meets your business requirements. Along with, keeping your customers happy.