International Payment Methods

There are plenty of international paying methods for importers and exporters
across the globe. And as the world continues to globalize, we’re seeing an increase
in international payment modes. But as with Incoterms, the parties lying at the split
ends of the spectrum have clashing agendas and priorities to fulfill and to look out
for.

When it comes to cross-border payments, buyers tend to prioritize the cheapest and
most straightforward payment method. In other words, anything that can help
reduces cost. Another priority is ensuring they receive the goods specified.

While buyers prefer paying as late in the transaction process as possible, sellers
will want to be paid in full, as quickly as possible, and via a secure option. Sellers
who offer attractive payment terms and varying methods will have an advantage
over those who limit themselves.

The main international payment methods used around the world today include:

 Cash in Advance
 Letters of Credit
 Documentary Collections
 Open Account
 Consignment
Cash in Advance

Also known as pre-payments, cash in advance is as it sounds. The buyer completes

the payment and pays the seller in full before the merchandise is delivered and
shipped off to the buyer.

While there are plenty of cash in advance payment methods available, credit card
payment and wire transfers (electronic payment via banks) are the more commonly
used payment modes.

While this is an attractive option for sellers, it’s presents a significantly high risk
for buyers as it produces a disadvantageous cash flow and no definite guarantee of
receiving the goods or the condition in which they arrive.

This is generally a recommended option for sellers who are dealing with new
buyers or buyers with weak credit ratings, and/or for high-valued products.

Other cash in advance methods include:

Debit card payment

Telegraphic transfer
International cheque, etc.
Letters of Credit

A Letter of Credit is one of the most secure international payment methods for the
importer and exporter as it involves the assistance of established financial
institutions such as banks as an intermediary and a certain level of commitment
from both parties.

With a Letter of Credit, payment is made through both the buyer and sellers’
banks. Upon confirmation of trade terms and conditions, the buyer instructs his
bank to pay the agreed-upon sum by both parties to the seller’s bank. The buyer’s
bank then sends a Letter of Credit as proof of sufficient and legit funds to the
seller’s bank. Payment is only remitted after all stated conditions are met by both
parties and shipment has been shipped.

Letters of Credit are also sometimes known as LC, bankers commercial credit or
documentary credit.

Documentary Collections

Documentary collection is a process in which both the buyer’s and seller’s banks
act as facilitators of the trade.

The seller submits documents needed by the buyer, such as the Bill of Lading,
which is necessary for the transfer of title to the goods, to its bank. The seller’s
bank will then send these documents to the buyer’s bank along with payment
instructions. The documents are only released in exchange for payment, which is
remitted immediately or at a specified date in the future.

With documentary collections, also known as Bills of Exchange, the seller is

basically handing over the responsibility of payment collection to his bank.

Open Account

Under Open Accounts (also known as Accounts Payable), merchandise are shipped
and delivered prior to payment, proving to be an extremely attractive option for
buyers especially in terms of cash flow. On the other end of the spectrum,
however, sellers are faced with high risks.
With this payment option, the seller ships the goods to the buyers with a credit
period attached. This is usually in 30-, 60-, or 90-day periods, during which the
buyer must carry out full payment.

Open Accounts are usually only recommended for trustworthy and reputable
buyers, for buyers and sellers who have an established and trusting relationship,
and/or for exports with relatively lower value to minimize risk.

Consignment

The consignment process is similar to that of an open account whereby payment is

only completed after the receipt of merchandise by the buyer.

The difference lies in the point of payment. With consignment, the foreign buyer is
only obliged to fulfil payment after having sold the merchandise to the end
consumer. This international payment method is based on an agreement under
which the foreign seller retains ownership of the merchandise until it has been
sold. In exchange, the buyer is responsible for the management and sale of the
merchandise to the end customer.

Consignment is usually only recommended for buyers and sellers with a trusting
relationship or reputable distributors and providers. Given the high risk involved,
sellers should make sure they have adequate insurance coverage that can cover
both the goods from transit to final sale and mitigate any damages caused in the
event of non-payment by the buyer.