In order to succeed in the current world market, the exporters must offer their customer’s attractive terms of sale with appropriate payment methods. In every export sale, a payment method should be selected to minimize the risk of payment while meeting the needs of the buyer. Generally, the import is a direct purchase of goods from retailers, manufacturers, or by an individual for personal use. We try to explain here these methods from the safest to the least secure for export payment terms in international trade.
Export Payment Terms
Cash in Advance:
Cash in advance is the safest and best method of payment in international trade for the exporter. Here, they ship the goods to the buyer only after receiving payment from them. In trade, bank transfers and credit cards are the most used prepayment options by exporters. Exporters prefer cash in advance before shipping orders because there is no risk of default.
The exporter can avoid the credit risk as payment is received before the transfer of ownership of the goods. Importers have a fear that the goods will not be delivered on time if payment is made in advance. The advance payment method can be problematic if the products are damaged or not delivered on time. The exporter can accept credit card payments to stay competitive.
Letter of Credit:
Letters of credit (LC) are one of the safest methods available for international merchants. The buyer’s bank gives a written commitment to the seller, called a letter of credit. It is a guarantee for the exporter that the buyer’s payment will be settled according to the schedule and will be subject to the agreed terms and conditions. The buyer provides credit and pays his bank to give this service. An LC protects the buyer because no payment obligation arises until the goods are delivered as promised.
An LC requires an importer and an exporter, with an issuing bank and a confirming bank. In credit enhancement – the issuing and confirming bank replaces the export payment guarantee of the importer and the exporter. Exporters can consider that confirmed LCs when importers request extended payment terms. Make sure that all the documents are consistent with the terms and conditions of the LC.
Open Account:
Due to heavy competition in export markets, the buyers pressure exporters on open account terms. The provision of credit by the seller to the buyer is a more common one. The credit period can be a fixed term – 30 days to 60 days etc. An exporter can accept an open account payment method if there is a relationship of trust between the two parties. If the amount involved is negligible. Exporters should take steps to manage the risk. They can offer competitive conditions while way reducing the risk of non-payment method. They offer, export credit insurance for additional protection. The exporter can choose to opt for this method of payment. An importer is a strong player with prospects of high volumes in the future.
Consignment:
Consignment method is another method of open account in the trade business. We recommend this for both with a relationship of trustable distributors and suppliers. Consignment sales can provide the exporter with great benefits which may not be visible at first glance. The shipment increases the chances to become more competitive based on better engaging and fastest delivery of goods. Export on consignment is risky, as the exporter has no guarantee of payment. A person outside of the exporter’s control has possession of his stock. Sellers must ensure that they have adequate insurance cover by both goods from transit to final sale.
