Getting Paid in International Trade
The risk of not getting paid is one of the biggest challenges for companies involved in or considering international trade for the first time. It’s important to recognize that there will always be two competing interests at play: the exporter’s need to accelerate receiving payment before ownership of the goods is transferred and the importer’s need to delay making payment until the product or service is delivered in full.
The appropriate payment tools can help you expand your international trade activities and reduce your payment risks, so it’s important to find the ones that are right for your business. Here are some of the most popular options.
1. Credit Check
Be sure to conduct a credit check on any new importer before closing a sale in an international market. The credit report will issue a rating on the credit worthiness of the importer and also provide information on the importer’s existing lines of credit from other suppliers and their payment history. The credit can help you make an informed decision on the payment method that an exporter should apply to the international sale.
- New customers
- New markets, especially where there is little or no information on the importer
2. Cash in Advance or Prepaid
Exporters prefer this method because it eliminates any payment risk because the goods are only shipped after payment is received in full. However, this is the least attractive payment method for an importer and therefore affects the exporter’s ability to compete and win the international sale, especially against similar suppliers who extend credit terms to customers.
Advance payments can be done through a bank draft, wire transfer, Paypal account or credit card. Credit card payment is often a preferred method for cash-in-advance transactions because it is fast, secure, convenient and cost effective way for both the exporter and the importer to receive and make payments.
- First-time customers with no credit history
- E-commerce websites
- Customers who did not pass your credit check
- Low value shipments
- Goods that are in high demand
3. Open Account
Open-account terms are a popular tool used to expand international business especially for exporters who are competing against several competitors for the same pool of customers and markets. However, open account is least advantageous to the exporter because the goods are shipped or released to the importer before payment is made and the importer will pay for the goods in 30, 45, 60 or 90 days depending on the terms. This opens the exporter up to the risk of payment default and should be used in conjunction with export credit insurance to mitigate against this risk.
- For low-risk customers or markets
- In highly competitive markets with multiple suppliers competing for the business
- Use in conjunction with export credit insurance
4. Export Credit Insurance
Export credit insurance is one of the proven products designed to facilitate international trade expansion without exposing a company to unnecessary payment risks.
The product is similar to other types of insurance and involves a policy and a premium. The importer must agree to have a credit check done on their business by the exporter’s insurer who, in turn, will determine the importer’s credit worthiness and charge a premium for insuring any receivables corresponding to the approved importer. In the event that the importer defaults on a payment, the exporter can make a claim against their insurance.
5. Letter of Credit
In transactions where the importer is hesitant to pay for the goods in advance, a letter of credit can be used as a means of payment. In such a case the importer’s bank assumes the risk by agreeing to pay the exporter once all the export terms and conditions are met. Once the importer’s bank belongs to an international network of banks and is established as credit-worthy, the exporter can be assured of payment. Letters or Credit should be irrevocable which means that changes cannot be made once the letter of credit has been issued.
- Higher-risk situations
- New or less-established trade relationships when the exporter is satisfied with the creditworthiness of the buyer’s bank
6. Documentary Collections
This payment method also involves the importer’s bank, but in this case, payment is not guaranteed, as with Letters of Credit.
The exporter is required to send all of the export documents needed to clear the goods to the importer’s bank, which will only release them to the importer after payment is made.
- In established trade relationships
- In stable export markets
- For transactions involving ocean shipments
Different importers may require different payment terms. While it may take time to determine the best option, making an informed decision will help ensure that you get paid for your transactions.