11 July 2024
Before they even make their first sales call, exporters must determine the best way to get paid in full by their customers in a timely way. This means defining the terms of payment for international trade.
One of the most important tasks for anyone working in international sales is to keep track of factors that may influence a customer’s ability to pay. There are many reasons a customer in an overseas market might not pay, including political change, an economic shift, the state of their banking relationships, and the business culture in their market. Information about these factors and how they impact customer payment is critical to making the best decisions about payment terms when growing sales internationally.
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Common Methods of International Payment
There is no one payment option that is appropriate for all situations. Although cash in advance offers the lowest level of risk for exporters, many customers engaged in international trade cannot afford to pay in advance or do not want to do so. Even those customers willing to provide payment in advance may not be able to buy as much as they want or need under those terms. As a result, cash-in-advance payment terms can hamper an exporter’s ability to attract and retain customers. In some cases, exporters may lose business to competitors that are willing and able to offer more favorable terms of payment in international trade.
The good news is that there are other payment terms available for international trade. The first step in choosing the right one is to monitor a customer’s ability to pay and any factors that might influence or change that ability.
The second step is to use this information to identify the range of payment terms the company is willing to accept in order to accommodate customer needs. Each payment option has its pros and cons so companies should choose carefully based on the customer’s country, industry, creditworthiness, the length and strength of the relationship, and any other relevant criteria.
The most common methods of payment in international trade include:
Secure Payment in International Trade: Cash in Advance
The safest method of payment in international trade is getting cash in advance of shipping the goods ordered, whether through bank wire transfers, credit card payments or funds held in escrow until a shipment is received. While cash in advance is the most desired by exporters, especially in situations where the risks of non-payment are high, it is often much less desired by customers.
Exporters prefer cash in advance before shipping orders because there is no risk of default. They will also have the cash in hand if there is any problem with the order or the customer is unhappy or a shipment is damaged. If the exporter needs to provide a refund or credit in these cases, it can do so without worrying whether the buyer will withhold payment until the issue is settled.
The main drawback of cash in advance is that many customers may not want or be able to afford to pay in advance. Paying cash in advance for goods can harm cash flow and buyers may be concerned that they may not receive the shipment. As a result, an exporter that requires cash in advance may receive fewer orders from its customers and may even lose customers to sellers with less stringent payment terms.
Payment in international trade is a balancing act. Exporters may insist on cash in advance to secure their balance sheets. As a result, however, their sales and potential growth may suffer if customers seek out vendors with more flexible payment terms.
Pros and Cons of Cash in Advance
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Pros
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Cons
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| Buyer | None. |
Affects cash flow. Risk of not receiving shipment or no recourse for damaged goods. |
| Seller | Payment is made before goods are received. | Not a competitive advantage. |
Risky Payment in International Trade: Open Account Terms
At the other end of the payment risk spectrum is open account payment in international trade. Exporters can offer open account terms for payment in international trade by shipping goods to international customers before they receive payment for those goods with payments generally due in 30 to 90 days.
Open account terms can help to maximize potential sales volume because it is most advantageous and convenient to the customer. However, it is the highest risk type of payment in international trade for the exporter. Therefore, exporters need to consider whether the additional sales volume is worth the risk of payment default and take steps to manage that risk. This can include routinely conducting customer credit checks and looking for ways to minimize the impact of any payment default.
Pros and Cons of Open Account Terms
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Pros
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Cons
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| Buyer | Enhanced cashflow because payment not due until good are received. | None. |
| Seller | Can increase sales as this payment option is advantageous to the buyer. |
No guarantee of payment. No protection against cancelled order. |
Risky Payment in International Trade: Consignment
Similar to open account terms, consignment is an agreement that the buyer will pay for the shipment after the buyer sells the goods. The seller retains title to the goods until the goods are sold and the unsold goods are returned to the seller in a timeframe agreed to in the purchase contract. This is a very low-risk method of trade for the international buyer, but highly risky for the seller.
Pros and Cons of Consignment
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Pros
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Cons
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| Buyer | Payment is made only after goods are received and sold. | Relies on good faith that the seller will ship the goods. |
| Seller | Can reduce the costs of managing and storing inventory in a foreign country. | Delays payment and increases potential of not receiving payment. |
Conservative Modes of Payment in International Trade
Between the extremes of cash in advance, open account terms, and consignment are the options of documentary collection and letters of credit.
Documentary Collection as Payment in International Trade
Documentary collection involves having a bank collect payment on the exporter’s behalf once the buyer has received the goods ordered. Title to the goods does not transfer until the payment is completed. However, documentary collection does not verify the shipment or receipt of the goods involved and the exporter still has little recourse if the buyer still does not make the required payment.
Pros and Cons of Documentary Collection
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Pros
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Cons
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| Buyer |
Less costly than letters of credit. Payment is made only once goods are delivered. |
Payment is made before goods can be checked – relies on seller to ship goods as specified. |
| Seller | Seeler retains the title to goods until paid. |
No guarantee of payment. No protection against cancellations. Risk of having to pay for return transport if the buyer cannot pay. |
Letters of Credit as Payment in International Trade
Letters of credit guarantee payment from one bank to another on behalf of the buyer and seller. The buyer’s bank releases payment to the exporter as soon as it receives proof that all of the terms and conditions of the transaction have been satisfied by both buyer and seller. Letters of credit can be important ways to ensure payment when a buyer has little obtainable credit history. Buyers benefit because they do not have to pay until they have received the goods ordered.
Although they provide more balanced risk mitigation for both buyers and sellers, there is one major drawback of using documentary collection and letters of credit as a mode of payment in international trade. These options can be expensive, time consuming and cumbersome to manage.
Pros and Cons of Letters of Credit
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Pros
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Cons
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| Buyer |
Payment made after goods are received. Terms can be customized. |
Expensive. Relies on seller to ship goods as specified. Time consuming to manage. Expiration dates. Currency fluctuations can make the cost rise. |
| Seller |
Low risk of default because the sale is secured by the buyer's bank. Terms can be customized. |
Strict documentary requirements to prove what was contracted was provided. Currenty fluctuations can make profit fall. |
Factors to Consider When Choosing a Method of Payment in International Trade
Identifying appropriate terms of payment in international trade requires strong data and information about buyers and their creditworthiness. By paying attention to the details, exporters can make rigorous checks on their international customers, including gathering information on their banking arrangements and business partners.
Once terms of payment for international trade are in place, this attention to detail must extend to specific payment agreements and arrangements. Exporters must also carefully prepare the documentation necessary for transactions to take place and be completed in a timely way. No matter how an exporter handles payment in international trade, everything from letters of credit to customs and excise documentation and other official documents must be complete and factually correct. Few things can create more delays in payment in international trade than documents with incomplete or incorrect information and responses.
How Allianz Trade Can Help Secure International Trade Payments
The key factors for success in international trade are the same as those in domestic business arrangements: a clearly defined process for assessing payment risk conducted by well-trained employees with regular monitoring from the beginning of the transaction to its end.
Allianz Trade provides international businesses with access to the data and services necessary to conduct profitable and stable international trade. Beyond offering trade credit insurance to protect against loss from payment default, Allianz Trade also provides access to a suite of tools designed to support foreign trade, a collection service that operates worldwide, and the ability to support and integrate with each company's processes and systems. The overall goal is to make sure companies succeed in international trade by making sure agreed-upon payment terms for international trade are applied successfully.
Our trade credit insurance is much more than a policy: our customers have access to a suite of tools which support foreign trade, with the added benefit of a collection service that operates worldwide.
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Our expertise and commitment
Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate risks, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, Surety bonds, and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.
Our business is built on supporting relationships between people and organizations, relationships that extend across frontiers of all kinds - geographical, financial, industrial, and more. We are constantly aware that our work has an impact on the communities we serve and that we have a duty to help and support others. At Allianz Trade, we are strongly committed to fairness for all without discrimination, among our own people and in our many relationships with those outside our business.