Unless you deal in purely electronic goods, taking your business global means importing and exporting goods, supported by international payment methods that provide a balanced level of risk. On the exporter’s side, international trade comes with a risk of shipping goods and not being paid. On the importer’s side, it comes with a risk of paying for goods and the goods never arriving.
The right payment method for your business will be one that’s secure, cost-effective and comes with a risk that’s commensurate with the level of trust (and the reputation) of your international business partners. Being familiar with the main international payment methods will help you decide which ones could work best for you.
1. Cash in Advance
Lowest Risk for Exporters, Highest Risk for Importers
The most reliable international payment method for exporters (and the most straightforward payment method for both parties) is cash in advance. In this method, the importer makes a full payment, after which the exporter ships the goods.
The advantage for the exporter is no risk of non-payment and more cash up-front. For the importer, this payment method means negative cash flow and a risk of not receiving the goods or receiving defective goods.
Best For…
This payment method is best for exporters with a strong reputation who are shipping to a new buyer or a buyer with a poor credit rating. Exporters who only offer this payment method may risk losing business to competitors.
How to Pay
In an international trade situation, cash in advance isn’t actually paid in cash. Instead, importers pay using:
- Credit card payments
- Debit card payments
- Online payments through a payment gateway
- Prepaid debit card
- Wire transfer (telegraphic transfer)
- International cheque
2. Letter of Credit
Low Risk for the Exporter, Some Risk for the Buyer
A letter of credit works a bit like a credit card. The buyer and seller draw up a contract that outlines the terms that each must fulfil. The buyer’s bank checks that there are sufficient funds in the bank account and draws up a letter of credit.
Once the goods are shipped, the buyer’s bank sends the funds to the seller’s bank. There are several kinds of letters of credit, including documentary credit and revocable and irrevocable credit. The main risk is to the buyer, who has no guarantee that the goods will arrive as described.
Best For…
A letter of credit is best for large international payments when the exporter is known to ship products of reliable quality and the importer has the money up-front.
How to Pay
Letters of credit are arranged through the buyer and seller’s banks.
3. Documentary Collection
Most Balanced Risk
Documentary collection, also known as a Bill of Exchange, is the most balanced international payment method in terms of risk to the seller and buyer. While the seller doesn’t get paid before sending the shipment, the buyer can’t receive the shipment until the amount is paid in full (“documents against payment”, D/P) or makes a firm commitment to pay on a certain date (“documents against acceptance”, D/A).
With documentary collection, the buyer and seller draw up a contract of sale. Then, the seller ships the goods and gives the shipping documents (including the Bill of Lading, which indicates the condition of the goods for shipment) to their bank. Then, the seller’s bank issues a payment order to the buyer’s bank, which requests payment from the buyer. When the payment is made in full (or the buyer agrees to pay at the specified time, in the case of D/A), the seller’s bank passes the shipping documents to the buyer’s bank, which passes them to the buyer so that he or she can receive the shipment.
Best For…
Documentary collection is appropriate when both buyer and seller have a similar level of trust and reliability. While the buyer can’t receive the goods without paying, it’s still possible that he or she could abandon the goods and not pay.
Likewise, the buyer waits for confirmation of shipping before paying for the goods. However, there is no guarantee that the shipment is in top condition. Documentary collection is more cost-effective for the buyer than a letter of credit.
How to Pay
The documentary credit payment process takes place through the buyer and seller’s banks and can be settled using various methods, including:
- Cash
- Cheque
- Electronic funds transfer
4. Open Account Payment Method
High Risk for the Exporter, Low Risk for the Importer
With an open account or accounts receivable method, the seller ships the goods and gives the buyer a credit period—usually 30, 60 or 90 days—to pay. This is one of the most popular global payment methods with smaller countries and buyers in general (understandably) as it allows them to delay payment until they have:
- Received the goods
- Inspected them for quality
- Used, sold or distributed the goods
Best For…
This method is best for reputable buyers who are importing goods from a new exporter or an exporter without a solid track record. This method is also used when exporters and importers have a long-standing relationship and the exporter trusts that he or she will receive payment in full at the agreed time. Your merchant services provider can set up an automatic payment at a specified time if you’re using the open accounts system.
How to Pay
As an open account arrangement is between the two parties and doesn’t involve banks, invoices can be settled in several ways:
- Credit or debit card
- Online payments
- Wire transfer
- Cheque
5. Consignment
Highest Risk for the Exporter, Lowest Risk for the Importer
In a consignment arrangement, The seller ships the goods immediately and only gets paid when the goods are sold to the end customer. The exporter retains ownership of the goods until they are sold. This method typically allows buyers to receive goods quicker and reduces exporters’ warehouse costs.
Best For…
A consignment arrangement is usually used when there is a good relationship between buyer and seller and the goods are on pre-order or are highly likely to sell. The success of consignment shipments depends on the distributor as well as the importer, so it’s essential for exporters to choose their distributors well.
How to Pay
Consignment shipments can be paid for using any of the payment methods listed for open account payments: card, online payment, wire transfer or cheque.
Things to Keep in Mind with Cross-Border Payments
When working with foreign buyers or sellers, it’s essential to do your due diligence to ensure that any potential business partners are reputable and reliable and source their goods and materials ethically. You’ll also need to obtain import and export permits, including an EORI number if you start an import/export business in Europe.
When paying a foreign seller or invoicing a foreign buyer, you’ll also need to make sure that you have safeguards—such as fraud protection and chargeback mitigation—and use a PCI-compliant payment processor for payments made via credit or debit card.
Finally, if you’ve chosen appropriate payment methods for each buyer or seller, you can take out export credit insurance to cover the value of the goods in transit. You never know what might happen to the shipment and it’s always best to be prepared.
