Receiving payment for your goods is arguably the most important aspect of international trade, or indeed any trade! While many businesses focus predominantly on negotiation of their contracts and setting their price, equal consideration needs to be given to the mechanics of getting paid.
In international trade you have 4 main options for getting paid. Each one has different risks, costs, and timescales associated with them so you will need to consider which will work best for your business.
The 4 main options for getting paid are as follows:
Great terms if you can get them for the seller. Just as the name suggests, with this method the buyer pays for their goods upfront and then you despatch them. This is essentially what happens when you buy something online.
As the seller this is very advantageous for you because there is no risk involved; you already have your payment before you even ship your goods. It’s also good for cash flow and means you don’t have any costs associated with debt recovery. It’s quite common to insist on payment in advance when dealing with services, a customer who could be high risk (poor credit rating) or it is a new trading relationship.
The main barrier to this method is that customers may be reluctant to do business on these terms, so you may find it harder to sell your goods this way – especially if you are in a competitive market where the buyer has more choice.
There are different types of letters of credit but essentially it is where the two parties to the sales ask their respective banks to act as a guarantor for the buyer provided all the conditions of sale are met. This will usually include things like all documentation being in order, and evidence that the goods being delivered to the right place and on time. When the letter of credit is established the buyer’s bank instantly takes a lien on the monies setting them aside in the buyer’s bank account in this way the seller is guaranteed payment as long as they comply with all the conditions set in the letter of credit .
This is good for you as the seller as it guarantees that you will be paid as long as you abide by the terms of the sale. It’s also good for the buyer as they know that their goods have to be successfully delivered before payment is due.
There are, however, charges involved in the transaction and they can be quite high so these will have to be factored into your costs.
This is where your bank collects the money on your behalf, also known as a documentary collection. Your bank forwards an instruction document to your buyer’s bank for release against either payment or acceptance of a Bill of Exchange.
This method works best when there is a Bill of Lading involved as this is a document of title and offers an additional lien on the goods. It doesn’t eliminate all risk but it’s less time consuming or expensive than a letter of credit.
This method essentially offers your buyer a period of credit, often quoted in 30, 60, or 90 days periods. It means that the risk is mainly on your part as you won’t receive payment for some time after you have shipped your goods. This could impact on cash flow and there is also the risk of non-payment (though there are things you can do to mitigate this risk).
While it can be risky, this type of arrangement can help you to secure contracts as it is more attractive to buyers. It is very important that you conduct all due diligence with any buyer before offering an open account so that you can be confident that payment will be received, especially in new trading relationships.
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