If you are trying to find the best international payment method, you should take a few different things into account. Of course, the most important factors are the risk involved in the process and the role you have in the relationship with the buyer. By analyzing these things, you should be able to make the right decision. Now let’s highlight the common payments methods.
According to many experts, an open account is among the least secure international payment methods if you are an exporter. In this way, the buyer gets the products and pays after that. In most cases, there’s a credit period involved (typically between 30 and 90 days).
Open account is a method of payment which extends the time needed for your business to get cash. In case there’s a period of credit involved, there will be an additional negative impact on your working capital position.
Our advice is to take this method into account only if you find yourself in situations like these:
- Exports of smaller value
- The buyer represents a multinational business which comes with a good buyer credit rating
- You’ve been working with the buyer for a long time
There’s no doubt that this is a much more secure method compared to an open account. This means that the bank collects the money on the behalf of the seller (you). In some cases, this method is called a documentary collection.
So, if you select this method, an instruction document will be forwarded by the bank you’ve selected to the bank used by your buyer. The document will ask for release against Acceptance of a Bill of Exchange or Payment.
This is a medium-level payment method in terms of risk. Of course, there’s still some level of risk involved for both parties. It’s good to know that this is a relatively fast method and an inexpensive one especially when we compare it to a letter of credit.
Letter of Credit
A letter of credit represents an official bank promise given to another bank that they know you. In addition, they will vouch that they will act as a guarantor for a specific transaction. In order to act in this specific way, you will have to come to an agreement between both banks and parties involved in the transaction.
When it’s all agreed, in case your buyer can’t make payment, you will be covered by the bank. The bank will also pay any outstanding amount, but only if the delivery conditions are met.
When it comes to this method, it’s crucial to remember that in case you get a letter of credit, it is very important to read and check all the details in it. Don’t leave this task for later.
Don’t forget that this is a document that should guarantee that your business will be paid in a timely manner. If you don’t analyze the details, you can end up with late payment which will eventually cost you a lot of money.
If you want to ensure that you will minimize the risk as an exporter, you should take advantage of advance payment. This is a payment method where the buyer must pay the goods before they actually get these goods. Think of it as a method used by regular consumers who are buying things online. They usually pay for the goods right away and receive the goods later.
It’s highly recommended to use this method in certain situations including situations where:
- You’ve established a new relationship with a buyer and you have to build trust
- You are working with a buyer with a weak credit rating
- You are offering expensive rare and/or unique products
When you choose the right payment method, organize everything well and proceed with your business operations.