International Exports
Operating in a global marketplace puts you in competition with multinationals and local firms. To attract international customers, ensure your offerings are high-quality, diverse, and available at competitive rates with a simple purchasing process.
Exporting to new overseas markets can reduce systemic risk, expand market share, and lower costs. However, it also comes with financial risks, such as non-payment or delayed reimbursement. To counteract these risks, there are several payment mechanisms export firms may use.
Securing Your Payment on International Exports
Payment in Advance
This is perhaps the most secure method of conducting export operations. Instead of dedicating resources to debt collection, your firm can ensure payment by sending an advance receipt to your buyer. After approval, the buyer can pay by wire transfer, draft mail, or credit card. However, mailed checks can cause delays of 4-6 weeks, undermining the benefit of advance payment.
Buyers rarely use this method due to the risks it poses. The buyer can’t inspect the goods or confirm payment before they arrive. In such cases, sourcing locally might be better, potentially losing your competitive edge.
Letters of Credit
This method of payment offers security to both parties and is perhaps the most common mechanism for export payments. The importing party arranges for their bank to guarantee payment on their behalf, as long as they meet all contract terms. If the bank is reputable, this method ensures the buyer’s credibility. It also assures the buyer that they will receive the products they agreed to buy.
Documentary Drafts
In this situation a bank will serve as an intermediary on behalf of the exporter, coordinating the exchange process. The bank will hold the necessary ownership documentation entitling the buyer to take possession of the goods, only completing the transfer when the buyer has fulfilled their obligation as negotiated. The documentary draft, or bill of exchange, requires both the importer and the exporter to sign it, promising payment of a specified amount upon delivery by a certain date. The bill guarantees that payment will be made no matter what underlying disputes and negotiations take place. In this situation, the bank handles all collections, and the buyer makes payment directly to the bank, which hands over necessary titles once the transaction is completed. Explore further by checking out 5 Tips for New Importers and Exporters
Open Account
Where the exporter has strong assurances about the credibility of the buyer, and their ability to pay on time, they may ship goods without issuing any sort of negotiable instrument that states the buyer’s legal obligation to pay a certain amount at a certain date. Under this payment method ownership of the goods passes to the buyer before payment is made, subjecting exporters to the full risk of defaulted payment. Without any documentation or financial intermediaries involved, it can be very difficult to pursue payment claims in foreign countries. This method also poses significant financing risk, as few banks will be willing to finance a transaction where payment cannot be legally guaranteed.
However, if you carry out all necessary research on the importing party, and can prove a strong track record of payment and a good international reputation, then this method of payment can provide you with a vital advantage over competing companies both locally and internationally.
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