5 Payment Methods in International Trade Upload

Summary

This video provides an overview of five common payment methods used in international trade. It explains the most secure method, cash in advance, where importers pay before receiving goods. Other methods include open account transactions, where goods are shipped before payment, and consignment, where payment is made after the goods are sold. Documentary collection, where payment is collected via banks, is another method, along with letters of credit, which provide security for both parties. The video highlights the risks and benefits of each method and offers advice on choosing the right one for businesses.

Takeaways

• 😀 Cash in advance is the most secure method of payment for the exporter, as the importer pays before the goods are shipped.
• 😀 Smaller importers often rely on cash in advance since their consignments are low in value and do not represent significant sales for the exporter.
• 😀 The risk of financial loss is higher for importers who pay cash in advance if the exporter fails to deliver.
• 😀 Small businesses can consider using financial institutions to import goods, where the institution handles the import process and reduces the risk of loss.
• 😀 An open account transaction allows the goods to be shipped and delivered before payment is due, which is advantageous for the importer but risky for the exporter.
• 😀 Open account transactions are typically offered to large importers, especially those procuring high-value consignments.
• 😀 Consignment in international trade is similar to an open account, but payment is made after the goods are sold by the foreign distributor.
• 😀 Documentary collection is a method where the exporter’s bank forwards documents to the importer’s bank to collect payment for shipped goods.
• 😀 Documentary collection is less common in countries with weak enforcement of contracts, but multinational companies may use it for internal trade.
• 😀 A letter of credit provides security for both parties, ensuring payment for the exporter and delivery of goods for the importer once conditions are met.

Q & A

What is the most secure payment method for exporters in international trade?

Cash in advance is the most secure payment method for exporters because the importer pays before the goods are shipped.

Why do smaller importers often pay cash in advance?

Smaller importers usually pay cash in advance because the value of their consignment is low, and the order does not represent a significant sale for the exporter.

What risks do smaller importers face with cash in advance payments?

Smaller importers risk losing money if the exporter fails to deliver the goods as promised.

What alternative method can smaller businesses consider for importing goods?

Smaller businesses can consider having financial institutions import goods on their behalf, where the financial institution manages the entire import process.

What advantage does the financial institution offer to small businesses?

The financial institution takes responsibility for the entire import process, lowering the risk of financial loss and allowing the small business to focus on its core activities.

What is an open account transaction in international trade?

An open account transaction involves goods being shipped and delivered before payment is due, typically within 30, 60, or 90 days.

Who benefits the most from open account transactions?

Importers benefit from open account transactions as it helps their cash flow and reduces costs, but it is risky for the exporter.

What is consignment in international trade?

Consignment is a variation of open account where payment is made to the exporter only after the goods are sold by the foreign distributor to the end customer.

What is documentary collection in international trade?

Documentary collection is a method where an exporter’s bank forwards documents to the importer’s bank to collect payment for shipped goods.

What is the main benefit of a letter of credit in international trade?

A letter of credit provides security for both parties, ensuring that the exporter receives payment and the importer receives goods as specified before payment is made.