Choosing an International Payment Method

February 22, 2023

If your business is related to international sales, the crucial thing you should keep an eye on is whether your customers will be able to pay you. This can impact all your operations and require a lot of adaptation, as there are several factors that can make it difficult for a customer to pay in a foreign market.

The challenges include the changes in the political or economic climate, the strength of banking relationships, and the business culture in the country you operate. It’s essential to have a thorough understanding of these factors and how they might affect your customers so that you can make smart decisions about payment terms to expand your sales internationally.

Common Methods of International Payment

There is no one-size-fits-all payment solution that works properly in every situation. While cash in advance is the least risky option for exporters, many customers involved in international trade cannot afford it or just don’t want to pay ahead of time. This means that insisting on cash-in-advance terms can limit an exporter’s ability to attract and keep customers. 

Sometimes, competitors who offer more favourable payment terms in international trade may win over customers, causing the exporter to lose business. The good news is that there are alternative payment terms you can consider for international trade. 

To select the right payment option, the first step is to keep track of the customer’s ability to pay and any factors that could potentially impact or change that. The second step is to use this information to determine which payment terms the company is willing to accept to meet the needs of the customer. 

As each payment option has its advantages and disadvantages, a company should choose carefully, considering various factors, such as the customer’s country, industry, creditworthiness, the duration and strength of the relationship, and other relevant criteria.

The most common methods of payment in international trade include:

  • Cash in advance
  • Open account terms
  • Consignment
  • Documentary collection
  • Letters of credit

Secure Payment in International Trade: Cash in Advance 

The most secure payment method in international trade is payment in advance before shipping the ordered goods. A company can make a bank wire transfer, use a credit card payment, or hold the funds in escrow until the shipment is received. While cash in advance is the most preferred option for exporters, especially when there is a high risk of non-payment, it is less desirable for customers.

Exporters prefer cash in advance because it eliminates the risk of a payment default. In addition, if any issues arise with the order (damage during shipment or customer dissatisfaction), the exporter already has the cash in hand. If a refund or credit is needed, the exporter can do so, but they do not have to worry that a buyer will withhold payment until any issues are resolved.

The main disadvantage of cash in advance is that many customers may not be willing to accept this payment condition. Paying for goods in advance can be harmful to cash flow, and buyers may be worried that they won’t receive the shipment. Even those who are willing to do so may not be able to pay as much as they need or want because of the terms. Consequently, an exporter that requires cash in advance may receive fewer orders from customers and could even lose customers to sellers with more flexible payment options.

In international trade, choosing the right payment option requires finding the right balance. Exporters may feel that cash in advance is necessary to safeguard their balance sheets; however, insisting on this payment option may harm sales and limit potential growth.

Risky Payment in International Trade: Open Account Terms

On the opposite end of the payment risk spectrum are open account payments in international trade. This payment option involves exporters shipping goods to international customers before receiving payment, with payments generally due in 30 to 90 days.

Open account terms can be advantageous for maximising potential sales volumes, as they are the most convenient option for customers. However, this is also the highest-risk type of payment in international trade for exporters. Exporters must weigh the additional sales volume against the risk of payment default and take steps to manage it.

To mitigate the risk of non-payment, exporters can conduct routine customer credit checks. By taking proactive measures to manage risk, exporters can offer open account terms while minimising the potential negative impact on their business.

Risky Payment in International Trade: Consignment

Consignment is a payment agreement where the buyer agrees to pay for the shipment after the company sells the goods. It is similar to what open account payments offer, but the main focus is not on the shipping but rather on the sale. In this arrangement, the seller retains title to the goods until they are sold, and any unsold goods are returned to the seller within a timeframe agreed upon in the purchase contract. 

This payment option is very low-risk for the international buyer but highly risky for the seller, as the firm is essentially providing the goods upfront with no guarantee of payment until they are sold.

Conservative Methods of Payment in International Trade

Between the two extremes of cash in advance and open account terms/consignment, there are two other payment options in international trade: documentary collection and letters of credit. Let’s see why you might want to choose them.

Documentary Collection as Payment in International Trade

A documentary collection arrangement involves the exporter having a bank collect payment when the exporter ships the goods to the international customer. The client sends payment documents to the bank. The title to the goods is not transferred until the payment is completed.

This option is less risky for the exporter than open account terms and provides the buyers with some flexibility, as they can inspect the shipment before paying. The drawback is that the exporter still has little recourse if the buyer does not make the required payment.

Letters of Credit as Payment in International Trade

Letters of credit provide more security for the exporter. In this arrangement, the buyer’s bank issues a letter of credit, which is an agreement to pay the exporter a specified amount of money stated in the bill of lading or invoice. The buyer’s bank releases payment once it receives proof that all the terms of the transaction have been satisfied by both sides. This is a nice option when a buyer has a little obtainable credit history.

Letters of credit provide security for the exporter as long as the documents comply with the payment terms. Buyers also benefit because they do not pay until they receive the goods ordered. However, this payment option can be more costly and time-consuming than other methods.

Factors to Consider When Choosing a Payment Method

It’s crucial to identify the right terms of payment for your business to thrive. This requires a thorough understanding of your buyers and their creditworthiness. As an exporter, paying close attention to the details can help you perform rigorous checks on your international customers, including obtaining information on their banking arrangements and business partners.

Once you’ve established the appropriate terms of payment, focus on the specific payment agreements. You need to be careful in preparing the necessary documents for the transactions to take place smoothly and on time. Any incorrect or incomplete information can cause significant delays in payment, which can be detrimental to your business.

Summing up, the success of your international trade endeavours depends heavily on your ability to pay attention to the details. With the necessary data about your buyers and a rigorous approach to documentation, you can ensure that transactions are completed efficiently. This will help you build long-lasting relationships with your customers.

How Payrow Can Help Make International Trade Payments

If you’re searching for a reliable platform to facilitate  international transactions for your business, Payrow is the perfect solution. 

Our advanced technology enables your company to expand globally, connecting new customers with sellers and establishing a broad client base. With just a few clicks on our website, you can make international payments to countries across the world. 

Don’t wait any longer to take your business to the next level. Contact us today to learn more about our services and receive a personalised quote. Let Payrow help you simplify international transactions and guide your business towards success.