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What is cash in advance payment method in international trade?

Cash in advance in international trade is a payment term when the customer is required to make full payment before the seller initiates shipment. Know more here.

In international trade, various methods are used to ensure smooth and secure transactions between customers and sellers across borders. One such method is cash-in-advance payment, which plays a vital role in mitigating risks and building trust in global commerce.

What is cash in advance payment method?

Cash in advance in international trade allows exporters to mitigate credit risk by receiving payment before transferring the ownership of goods. Upfront payment is generally unfavorable for customers due to cash-flow issues.

Exporters who solely relying on cash in advance may risk losing business to competitors with more flexible payment options. Balancing the needs of both parties is crucial for successful international trade.

Types of cash in advance payment method

Here are some common types of cash in advance payment methods¹:

1. Wire transfer

Wire transfers involve direct transfer of funds from the customer’s bank account to the seller’s account. It is a widely used and secure method that allows for quick payment processing, making it convenient for both parties.

2. Credit card

Credit card payments provide a convenient and widely accepted cash in advance option. Customers can make payments using their credit card, offering flexibility and ease of transaction. It is important to note that credit card transactions may incur processing fees.

3. Escrow service

Escrow services act as intermediaries, holding the customer’s payment in a secure account until the goods are delivered or services are rendered as agreed upon. This provides an added layer of trust and assurance for both buyer-customer sellers.

4. Payment by cheque

While less common due to potential delays and currency conversion issues, payment by cheque is still utilized in some cases. The customer issues a cheque for the agreed-upon amount to the seller, who receives payment upon check clearance.

When is cash in advance payment method used?

Usually, cash in advance is commonly used in one of the following situations:

• When dealing with a new customer or one with a limited operating history.
• If the importer’s creditworthiness is uncertain, unsatisfactory, or difficult to verify.
• In cases where the importer’s home country poses high political and commercial risks.
• When the exporter’s product is unique, exclusive, or in high demand.
• For exporters operating internet-based businesses, accepting credit card payments through cash in advance is crucial to remain competitive in the online marketplace.

Advantages of cash in advance payment method

Advantages of the cash in advance payment method in international trade include:

Guaranteed payment for exporters:

Funds are immediately available, enabling exporters to meet their financial obligations, such as capital requirements and production costs.

Ease of management:

Once all negotiations are completed, sellers can directly transfer funds to the customer without involving additional third parties, such as letters of credit. This streamlines the process and saves time, allowing for more efficient transaction management.

Reduced credit risk:

With cash in advance, exporters do not have to rely on customer’s creditworthiness or worry about potential defaults, ensuring a secure and stable financial arrangement.

Cash flow benefits:

Cash in advance payments allow for better financial planning, investment in business growth, and the ability to fulfill other financial obligations promptly.

Disadvantages of cash in advance payment method

A few disadvantages of cash in advance payment method in international trade are:

Trust between parties:

Importers must have confidence in exporter’s ability to deliver goods or services as promised. This trust is often built over time or through previous successful transactions.

Lack of guarantee for importers:

If goods do not meet the expected quality or if the exporter fails to deliver goods as agreed, it can be challenging for importers to recover their money.

Process of cash in advance payment method

The commonly followed process of cash in advance payment method in international trade is²:

Payment negotiation:

The customer and seller negotiate payment terms, including the amount to be paid upfront. This can be a partial payment, with a specified percentage paid initially and the remaining balance

Goods insurance:

The parties discuss the warranty or guarantee for goods. This ensures that the customer is protected if the delivered goods do not meet agreed-upon standards in terms of quantity, quality, or timely delivery.

Count other payments:

In addition to the cost of the goods, it is important to consider other expenses associated with the transaction including insurance documents, shipping costs, loading and unloading fees, and any applicable taxes or duties.

While cash in advance in international trade provides exporters with guaranteed payment, ease of management, reduced credit risk, and improved cash flow, importers may face the lack of guarantee and the need for a high level of trust. The appropriateness of cash in advance payment method depends on various factors such as the importer’s creditworthiness, nature of goods, and level of trust between parties involved.

With the growing use of e-commerce by customers across the globe, Indian exporters have the opportunity to directly sell to these international customers from the comfort of their homes through e-commerce exports.

Amazon Global Selling: Your passport to easy e-commerce exports

Starting an e-commerce exports business is a big step for any seller. With the right understanding and information, the process can be easy and simple. Amazon Global Selling is an e-commerce exports program that enables sellers like you to take your business from domestic borders to customers across the globe. With millions of customers across the globe, businesses can reach international customers and sell their products on 18 Amazon global marketplaces like Amazon USA, UK, UAE, Australia, and more.

Amazon also provides support through its tools and programs including Exports Compliance Dashboard for export documentation, Amazon Global Selling SEND for logistics and training through webinars and events.

Explore our monthly webinar calendar here

Frequently Asked Questions

What is a cash in advance example?

An example of cash in advance in international trade is when an exporter requires the customer to make a wire transfer or credit card payment before shipping the goods. The exporter receives the payment in cash before fulfilling the order, ensuring guaranteed payment and reducing credit risk.

What is the difference between payment in advance and cash in advance?

Payment in advance is a broader term that includes various methods of upfront payment, while cash in advance payment term refers to receiving payment in the form of cash before the transfer of goods or services.

Published on September 20, 2023.

Sources:
1. https://www.shippingsolutions.com/blog/methods-of-payment-in-international-trade-cash-in-advance
2. https://www.privacyshield.gov/article?id=Trade-Finance-Guide-Chapter-2
3. https://www.kickrate.com/payment/what-is-advance-payment-in-export-import/

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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.

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