For success in the global highly competitive market, the seller must offer the most comfortable payment terms. We need to find a win-win solution, because the seller is interested in a guarantee of 100% payment, and the customer is interested in the security of the transaction. There are five main methods of payment in international business.
Payment in Advance T/T. This is the most attractive payment option for the exporter. In international trade, bank transfers are the most popular. The development of online payments allows quick transactions. However, a prepayment requirement is not an attractive option for the buyer. Foreign buyers are also concerned that the goods cannot be shipped if payment is made in advance. In this case, the exporter may lose the customer to its competitor, who will offer more interesting payment terms. Our practice is this: 30% prepayment, 70% after loading the goods.
Letter of Credit LC. In order to make international transactions as secure as possible, letters of credits were created. Sellers and customers frequently choose this type of transactions for making international purchases. According to this method, the customer finds a bank commitment. Thus, the bank ensures that if all the terms from the seller’s side are met, then the customer will make payment. The state of obligations execution is verified by means of providing the required documents. If the customer wants to get this kind of services, he/she should go to the bank and establish credit that will be further paid. For sellers, such a document gives an additional guarantee in those cases when no trustful credit information about the potential customer can be obtained. For customers, the LC provides protection since until the product hasn’t been shipped, he/she has no payment obligation.
Documentary Collections Describing the essence of a documentary collection in a few words, it is mediation in the process of making the purchase. It is a type of transactions in which the seller, two banks, and the customer are engaged. The process looks like the following: the seller addresses to a remitting bank in order to entrust it to collect certain documents that are needed for making a purchase. Then, the bank employees send the documents to the bank the purpose of which is to receive the documents. It is the institution that is entitled to connect with the customer. The release of the documents that were received from the first institution to the customer is its main task. As the customer gets them, he/she can pay for a good. The following stage is when the customer gives funds to the collecting bank. When money is on the bank, it remits them to the first institution. The collection letter contains information about the necessary documents that will allow transferring of title to a particular good. During this operation, these banks serve as facilitators for the clients; nevertheless, this type of services does not imply any verification processes as well as limitations in the cases of non-payment. This procedure is usually cheaper than LC.
Open Accounts An open account transaction is a type of deals when the good’s payment is due after shipment as well as delivery is complete. Usually, the delivery time lasts for 28-87 days for international purchases. For the customer, it is one of the most profitable options in terms of either cost or cash flow. At the same time, for the seller, it is one of the worst options in terms of risks. But as the sellers face intense competition on the international market, they are pressed by foreign customers to provide open account terms. Thus, those sellers, who do not offer such credits, may lose customers and be swallowed by high competition. The sellers are free to choose one of the above described financial techniques of risks mitigation in order to reduce the level of goods non-payment. Sellers also can use export credit insurance in order to get extra protection when they offer open account terms.
Consignments International trade considers consignment as a type of open accounts. The essence of the technique is that the seller sends the good to the foreign distributor who is entitled to find the end customer and sell the product. The seller gets money for goods only after that moment when the end customer is found and the products are sold. Contractual arrangements are basic elements of international consignment transactions. According to this arrangement, the product is received, managed and sold by the distributor. This type of cooperation is quite risky for the seller since the goods are stored abroad and no payment at all is guaranteed. At the same time, such a transaction allows the seller to increase competitiveness due to better availability and make products delivery in a particular country faster. Due to consignment, the seller also can reduce the direct costs products storing as well as managing inventory. Such a way of cooperation is quite successful if the seller chooses a trustworthy logistics provider and reputable foreign distributor. An important part of consignment is appropriate insurance that allows mitigating the risks of non-payment or any damages while shipment.