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A guide on payment methods and terms in international trade

There are five major payment methods in international trade, including cash in advance, letters of credit, documentary collection, open accounts & consignments. Read to know more.

In today’s digital-first business world, businesses are trading seamlessly across borders, often reaching multiple markets simultaneously. This ease of connection, however, brings new questions about payment methods, which vary across marketplaces. Innovative payment solutions are now offering flexibility and security to both buyers and sellers globally. Exporters need to choose the right payment method by considering their specific needs and the legal regulations of both origin and destination countries. In this blog post, we’ll explore the key payment options in international trade, along with their advantages and disadvantages.

Payment methods in international trade

International payment terms depend on a lot of factors, like cross-border fees, foreign exchange fees, currency conversion and local regulations. In addition to this, certain risks are associated that impact payment exchange between parties across two countries:

● Foreign exchange risks: Usually associated with currency fluctuations.
● Political risk: Arises when countries change their government policies that may negatively impact business.¹

Types of payment terms in exports

The following are some key payment terms used in international trade and exports:

Cash-in-advance

With cash-in-advance terms of payment in international trade, exporters can eliminate the credit risk because payment is received before the products are shipped to the customer. For international sales, wire transfers and credit cards are the most commonly used cash in advance export payment method.²

Pros

● This export payment method is beneficial for exporters as they would receive full payments securely before shipment.
● No risk of non-payment from the foreign buyer is associated.

Cons

● Foreign buyers may be concerned about the risk of not receiving good quality products after the payment is made in advance.
● Exporters who consider cash-in-advance payment methods in international trade may lose out on business opportunities to competitors who offer more attractive payment terms in exports.

Letter of credit

This is one of the safest and most commonly opted modes of payment in international trade. In this, the customer’s bank gives a written commitment to the exporter, which is called a letter of credit (LC). It states a commitment by the bank on behalf of the importer that the payment will be settled to the exporter as per the timeline mentioned and will be subject to agreed terms and conditions.³

Pros

● Beneficial to the exporter as they are satisfied with creditworthiness of the customer’s foreign bank prior to the shipment of products.

Cons

● This is a time-consuming process and involves payment and fees.

Documentary collection

In this method, both parties involve their respective banks to complete the payment. The remitting bank represents the exporter while the collecting bank works on behalf of the customer or importer. Once the exporter ships products to the importer, they need to submit the shipping documents and collect orders to the remitting bank. Documents are sent from the remitting bank to the collecting bank along with instructions of payment. This is then passed to the buyer on which the payment from the collecting bank is transferred to the remitting bank. Finally, the exporter receives the amount from the remitting bank.

Pros

• This method is more economical than letters of credit.

Cons

• This does not involve verification of the importer. With no commitment of payment from the importer's bank, there is no protection against cancellations of products by the importer.

Open Account

An open account payment method in international trade is where the goods are shipped to the importer before the payment is due. Payment is agreed on the fixed credit period which can extend typically to 30, 60 or 90 days.

Pros

• Since the importer controls the credit period, they can better manage cash flow. For exporters, this payment option can help attract customers in a competitive market.

Cons

• Open account methods involve high risk for exporters. To minimize the risk, this payment mode is usually beneficial for buyers and sellers who have an already established and trusting relationship.

Consignments

The consignment mode of payment in international trade is a variation of open account in which the payment is sent to the exporter after the products have been sold by the foreign or third-party distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells goods to the exporter who retains title to the goods until they are sold.

Pros

● This method is more competitive and reduces the direct cost of storing and managing inventory.

Cons

● There is a lack of access to the end management of merchandize and no guarantee of payment after the sales to the exporter.

Other payment terms in exports

In addition to the primary methods of payment, exporters should also should also familiarize themselves with a few more terms. Here are some key terms:

1. Bank draft: Bank drafts provide guarantee of payment to sellers, reducing the risk of insufficient funds. Issued by the bank, these offer a safer alternative to personal checks, ensuring sellers receive full payment.
2. Transmittal letter: A transmittal letter is a document that accompanies the bank draft, detailing the purpose of the payment and any relevant information about the transaction. It serves to inform the recipient and streamline the payment process.
3. Telegraphic transfer (TT): Also known as a wire transfer, TT is an electronic method of transferring funds from one bank account to another. TTs are popular for their speed and efficiency in facilitating cross-border payments.⁴

How to choose the right payment method for exports?

Here are some factors to consider while choosing a payment model for international trade:

1. Cash flow availability and needs: Consider the importer’s availability and cash flow. For instance, understand if they will be able to pay right away or need time.
2. Legalities and import/export regulations of the destination country: Consider international trading conditions of the importer’s country such as import licenses, subsidies, tariffs and quotas etc.
3. Type of product: Is the product in high demand in the importing country? If yes, then the buyer might be willing to be more flexible with payment terms.
4. Creditworthiness of exporter and importer: If the importer or the exporter’s creditworthiness is poor, then the mutual agreement will suffer. It is important to know the credibility of both the parties for successful business.
5. Competitors’ offering: Research well to understand what other competitive businesses are offering in terms of export payment methods.

With e-commerce exports, you can reach international customers and receive payments seamlessly. For instance, exporters on Amazon Global Selling can sell on Amazon global markets and receive payments in INR directly in their bank account. For more support on international payments, you can explore the tools and services offered by Amazon Global Selling.

Amazon Global Selling: Easy e-commerce exports and hassle-free shipping

If you are a business owner and you want to sell your products to the world, Amazon Global Selling enables you to list and sell ‘Made in India’ products on 18 Amazon global marketplaces. As an e-commerce export program, Amazon Global Selling provides support and guidance at every step of your export journey, connecting you to Amazon’s Service Provider Network for tailored compliance, payments, and logistics support.

Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for Fulfillment by Amazon (FBA) and outsource order fulfillment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.

Guide to export with Amazon

Frequently Asked Questions

Which is better: TT or LC?

Letter of credit (LC) is a commitment by the bank on behalf of the importer that the payment will be settled to the exporter as per the timeline mentioned and will be subject to agreed terms and conditions. Telegraphic Transfer (TT) is an electronic fund transfer where money is directly transferred between banks.

Is TT and SWIFT the same?

No, TT and SWIFT are not the same. Telegraphic Transfer (TT) is treated as an electronic fund transfer where money is directly transferred between banks, while Society for Worldwide Interbank Financial Telecommunication (SWIFT) doesn’t facilitate fund transfers but sends payment orders.

What is the difference between a letter of credit (LC) or TT?

LC is the written document from the buyer to a foreign bank to pay the exporter a sum of money when certain conditions are met. On the other hand, TT is used when the foreign buyer is ready to pay for the products received.

Which is the most common payment method in international trade?

Letter of credit (LC) is the most common payment method in international trade.

Published on August 29, 2022.

Sources:

1. https://documents1.worldbank.org/curated/en/747241468329432546/pdf/402640Finance11Giovannucci01PUBLIC1.pdf

2. https://www.investopedia.com/ask/answers/06/internationalfinancerisks.asp

3. https://www.investopedia.com/terms/l/letterofcredit.asp

4. https://www.shippingsolutions.com/blog/10-terms-you-need-to-know-to-help-you-get-paid-for-exports

5. https://www.investopedia.com/terms/t/telegraphic-transfer.asp

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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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