Operating in a global marketplace puts you in competition with multi-nationals and local firms. For international customers to have a real incentive to choose your business, they must be assured of the quality and variety of your offerings while being able to obtain them at favorable rates in a relatively straightforward manner.
For exporting companies, being able to capture additional overseas markets offers vast opportunities for reducing systemic and seasonal risk, growing market share and lowering per-unit costs. But these opportunities bear a significant financial risk alongside, as companies must deal with the risk of non-payment or delayed reimbursement for their products. In order to counteract these risks, there are several payment mechanisms export firms may use.
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. Upon approval the buyer can then choose to send payment either via wire transfer, draft mail or credit card, it is important to remember that relying on mailed checks can create a payment delay of 4-6 weeks which can negate the original purpose of advance payment altogether.
This method is not commonly used due to the risks it creates for the buyer. The buyer cannot inspect the quality of goods or accuracy of shipment before payment, and in fact cannot even ensure that payment arrives. In this case they may be better served sourcing their goods locally, so any competitive advantage your business offers may be lost.
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 will set a facility with their bank to ensure that the bank makes a guarantee of payment on the buyer’s behalf. This payment is guaranteed on the basis that all contractually agreed terms and conditions are met by the exporting party, upon delivery. As long as bank providing the guarantee is a known entity, this method of payment provides exporters with a guarantee of the buyer’s credibility. It also assures the buyer that they will receive the products they agreed to buy.
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, also known as a bill of exchange is signed by both the importer and the exporter promising the payment of a specified amount at the point of delivery at 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.
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 carried 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.