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Payment Methods Of International Trade For Exporting And Importing

Payment Methods Of International Trade For Exporting And Importing

Running a business at an international level is not easy for anyone. It needs lots of potentials to handle things and bear risk. The biggest risk is related to the payment. If we talk about the new businessmen, then you can see their concern about the payment and suitable methods. Everyone wants to know about the best methods by which they can easily maintain financial transactions in the business.

There are multiple methods available by which you can easily settle down your transaction and complete the business agreement. Here, you need to check out several factors, such as - consent of another party, their comfort, your business terms, nature of the product, etc. Here, you have to check out everything perfectly. In the upcoming paragraphs, you can get detailed information about different types of payment methods.

1. Open Account

The open account payment method is a highly suitable option for importers. If you focus on the condition of exporters, then it is the riskiest option for them. The risk of bad debts or fraud is very high with the selection of this particular option. Mainly, the method functions on the basis of credit principles.

Here, the importer becomes liable for paying money after receiving the goods. For the payment, there is a specific credit time period set by the mutual consent of the exporter and importer. The importer has to pay the money within that particular period. Mainly, the duration of this particular period can be - 90 days, 60 days, 30 days, or as per their convenience and consent.

If you are an exporter, then you have to agree on the time period selection carefully. Sometimes, the selection of a long period can affect the working capital of the exporter by which he/she is not capable of providing the best services. Due to this particular thing, the exporter may face lots of burdens while dealing with the manufacturing and dispatching stages.

You have to make a final decision and sign the payment agreement as per the availability of your resources and some other major factors. In the open account payment method, the important element is trust.

2. Documentary Collection

In the case of the documentary collection method, the banks of both parties will deal legally for payments. Here, both importers and exporters have to involve their banks and give updates regarding everything. In this payment method, the exporter has to submit proof to their bank of sending goods in the form of proper shipping documents. Based on such documents, the export’s bank acts and asks the importer’s bank to confirm the delivery and further proceed on the payment.

On the behalf of importer and their actions, the importer’s bank makes final payment. In the end, the exporter receives payment from his or her respective bank. It is a secure and authorized way by which the business deals can be finalized and made with the proper attention of the experts. There are two types of documentary collection methods available.

Cash Against Documents

If you sign the contract under CAD/DP type, then the importer is liable for paying money after getting the documents. It means when you confirm the item shipping with shipping documents, then your bank sends it to the importer’s bank. The importer’s bank will ask the importer to make the final payment by accepting the shipping document as proof.

Document Against Acceptance

It is the longest type in the case of documentary collection payment method. It is also represented as the DA payment method. Here, the buyers are fully secured. The buyers have to make the final payment only after accepting the trade contract. When buyers accept the trade and confirm the conditions with an acceptance letter, then the bank will release the draft documents of the exporter and raise payment dues.

These are the two major types of documentary collection methods. It depends on you what kind of method you want to pick.

3. Letter Of Credit

If you want to get details about the most common method that is used by the majority of international traders for payments, then it is the letter of credit. It is one of the safest methods of making international payments as well. You can consider it as a big reason that’s why in most of the international trade transactions, you can find it as the payment method.

In this particular method, the most important role is played by the buyer. Here, the buyer will submit a specific letter to the bank where he/she will be giving the guarantee of making payment. This particular letter is known as the letter of credit.

The availability of a letter of credit works as the source of assurance by which the exporter can get some relief regarding final payment settlement. In case the importer creates issues in making the final payment, then the letter of credit will work as legal evidence and take some actions against the importer as well.

Releted: What Is A Letter Of Credit And Types Of Letter Of Credit?

4. Cash In Advance

It is the best and most secure method for the exporter. In this particular method, the risk is faced by the importers. Here, the buyers have to pay money with the placement of the order or before it will be shipped. In case the trade contract is signed under the cash in advance payment method and the importer does not make a payment, then the exporter has the right of holding the shipment.

Mainly, the importers are afraid of fraud while dealing under such conditions. They fear some unfavorable conditions where the exporter does not send goods after receiving the payment and stop responding as well.

5. Consignment

The consignment payment method is mostly like the open account method. Here, the importers have a large period for making the final payment. Generally, in these types of methods, the exporters are not dealing with a well-established business or a large scale importer. Mainly, they are dealing with some local distributors.

In this particular situation, the exporter will receive money when the distributor sells goods to the customers and receives money as well. People who have an interest in this particular method should rely on trustworthy distributors only.

Final Words

These are some major payment methods that you can use in international trade. You should pick the best option after inspecting everything. In case you don’t have clarity regarding any factor, then you should not make a final decision without proper knowledge. You have to discuss everything with the experts and get proper clarity only.

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