Advantages and Disadvantages of Different Payment Methods

1 Payment Methods

To succeed in today’s global marketplace, exporters must offer their customers attrac¬tive sales terms supported by the appropriate payment method to win sales against foreign competitors As getting paid in full and on time is the primary goal for each export sale, an appropriate payment method must be chosen carefully to minimize the payment risk while also accommodating the needs of the buyer During or before contract negotiations, it is advisable to consider which method in the diagram below is mutually desirable for you and your customer Once acceptable risks have been determined then the most appropriate payment method can be selected While this document is a useful starting point, the advice of a qualified financier or banker should be sought at least for the first transactions

The terms of payment used in an international transaction depend on:

- the relationship between the seller and the buyer

- the nature of the merchandise

- industry norms

- the distance between buyer and seller

- the potential for currency fluctuation

- political and economic stability in either or both countries

All of these factors must be considered before deciding on a method of payment that is acceptable to both parties The single most important factor, however, is the nature and length of the business relationship between buyer and seller Trust and confidence in the other party go a long way in both parties' willingness to accept payment terms bearing a higher degree of risk

1 1 Common Payment Methods

In international trade, both the buyer and seller are concerned with the completion of the deal Having contracted with the seller, the buyer wants to be sure that he receives the goods of the quantity and quality agreed On the other hand, the seller is eager to receive payments on time and in the currency required once he has sent the goods

There are four basic terms of payment used in international trade Ranked in order from most beneficial to the seller to most beneficial to the buyer, they are:

Cash in Advance

Documentary Letters of Credit

Documentary Collections

Open Account or Credit

1 1 1 Cash in Advance

Cash in advance is the most secure method of trading for exporters and, consequently the least attractive for buyers Payment is expected by the exporter, in full, prior to goods being shipped The method clearly is risk-free except for consequences associated with the potential non delivery of the goods by the seller Cash in advance is usually a wire transfer or a check

Although an international wire transfer is more costly, it is often preferred because it is speedy and does not bear the danger of the check not being honored The check can be at a disadvantage if the exchange rate has changed significantly by the time it arrives, clears and is credited On the other hand, the check can make it easier to shop for a better exchange rate between different financial institutions

Payment by cash in advance requires that the buyer pay the seller prior to shipment of the goods ordered Cash in advance provides the seller with the most security but leaves the buyer at great risk that the seller will not comply with all the terms of the contract