5 Payment Methods for International Trade

Summary

In this video, Kari Crane, editor of Shipping Solutions’ International Trade Blog Passages, explains the five primary payment methods used in international trade: cash-in-advance, letters of credit, documentary collections, open accounts, and consignment. Each method comes with its own risks and benefits, depending on the needs of the exporter and importer. The video highlights how exporters can mitigate risks through tools like trade finance and insurance. By balancing the competing needs of exporters and importers, businesses can choose the best payment method to ensure smooth and secure transactions.

Takeaways

• 😀 Exporters aim to get paid in full and on time to ensure smooth transactions.
• 😀 The choice of payment method is crucial to minimize risk while meeting the buyer’s needs.
• 😀 There are five primary payment methods for international sales, each with its own advantages and risks.
• 😀 Cash-in-advance allows exporters to receive payment before transferring goods but can be unattractive to buyers due to unfavorable cash flow.
• 😀 Letters of Credit (LC) provide a secure payment method, ensuring payment after the goods are shipped, but rely on the creditworthiness of the buyer’s bank.
• 😀 Documentary collections (D/Cs) are less expensive than LCs but offer limited recourse in the event of non-payment.
• 😀 Open account transactions are favorable for the importer but pose a high risk to the exporter, though trade finance techniques and insurance can mitigate this risk.
• 😀 Consignment payments are made after the goods are sold by the foreign distributor, but this method carries significant risk as the exporter isn’t guaranteed payment.
• 😀 Choosing the right payment method depends on balancing your risk tolerance with the buyer’s needs and situation.
• 😀 For more detailed information on payment methods, exporters can refer to additional resources such as videos, articles, and trade finance guides.

Q & A

What is the ultimate goal for an exporter in international trade?

The ultimate goal for an exporter is to get paid in full and on time for each export sale.

What is the key factor in choosing a payment method for international sales?

The key factor is to choose a payment method that minimizes risk while meeting the buyer’s needs.

What is the main challenge exporters face regarding payment timing?

Exporters want to receive payment as soon as possible, ideally before shipping goods, while importers prefer to delay payment until they receive and resell the goods.

What is the payment method of cash-in-advance?

Cash-in-advance is when the exporter receives payment before transferring ownership of the goods. It eliminates credit risk for the exporter but is less attractive to buyers due to unfavorable cash flow and concerns about whether the goods will be shipped after payment.

How do Letters of Credit (LC) work in international trade?

A Letter of Credit is a commitment by a bank on behalf of the buyer to ensure payment will be made to the exporter, provided all terms and conditions are met. It ensures payment only after the goods are shipped as promised.

What are the benefits and risks of using a Documentary Collection (D/C) payment method?

Documentary Collections involve the exporter’s bank sending documents to the importer’s bank, which releases them upon payment. While this method is cheaper than Letters of Credit, it offers no verification process and limited recourse in case of non-payment.

What is an open account transaction, and why is it risky for exporters?

An open account transaction involves shipping goods before payment is due, usually within 30, 60, or 90 days. While it benefits the importer, it poses high risk for the exporter. Exporters can mitigate this risk through trade finance techniques and export credit insurance.

How is consignment different from an open account transaction?

Consignment is a variation of the open account where payment is made only after the goods are sold by the foreign distributor. It is riskier for the exporter, as payment is not guaranteed, and the goods are managed by an independent distributor.

What factors influence the choice of payment method in international sales?

The choice of payment method depends on the exporter’s specific situation, such as the level of risk they are willing to accept and the buyer's preferences.

Where can exporters find more detailed information about payment methods and trade finance?

Exporters can find more detailed information through the links provided in the video description, including links to other videos, articles, and a downloadable Trade Finance Guide.