Effective Payment Methods In Global Import/Export Trade Finance
Timely, secured, and sufficient payments are one of the main pillars of operating a profitable international business and the most efficient way of expansion in the global market with satisfied clients. Irrespective of an established firm or a new one, importers and exporters often opt for third parties like banks or financial institutions to mitigate their global payment risks. These intermediaries provide payment guarantees and develop trust between parties to the contract regarding initiate transactions.
Being in an international business, you often need global trade finance to support your import or export payments in the different corners of the world but often struggle with dilemmas regarding the type or method of trade finance that would fit best for your business. In this blog, we have covered some of the most popular methods of global trade payments you can choose from depending on your business’s requirements. Let’s have a look:
1. Advance Payment (Cash Advance) - Cash-in-advance or Advance payment is a pre-payment trade finance method where the importer pays the exporter before the shipment of the goods. But it is not considered the appropriate method of import financing as the importers assume all the risks. While on the other side, exporters get the benefits of the availability of advanced working capital to further the production and shipment of goods. In other words, it is the least favorable method for importers and therefore recommended to use only in low-value orders. It may cause cash flow issues for the buyers.
2. Cash Against Documents (CAD) - The popular method of global trade finance is also known as Documentary Collections (DCs) by most exporters and importers where the exporter/seller can request and get payment from the importer/buyer by presenting the shipping and collection documents to their remitting bank. The remitting bank is responsible for forwarding these documents to the importer’s bank so that they could pay to the exporter’s bank and it will credit those funds to the exporter. The only drawback of this trade finance method is the limited role of the banks ie. They are only responsible for verifying the documents or guaranteeing the payment.
3. Letters of Credit (LCs) - Letters of credits are one of the most preferable trade finance instruments where a bank or a financial institution provides an irrevocable commitment on the behalf of the importer guaranteeing payment for the delivered goods and services as long as the certain terms are met. By doing this, the importers shift their payment risks to the banks and exporters assume the credit risks of the bank instead of the importers. Also known as documentary credits, this legal document guarantees that the seller will be paid on time if the buyer defaults to pay. The issuance of LC requires an importer, exporter, an issuing bank, and a confirming bank respectively. The advantage of using LCs include their worldwide acceptance and ability to customize by parties to the contract.
4. Business Loans - One of the more suitable trade payment methods of global trade finance is easier business loans thanks to their easy-to-understand & executing process. It brings a myriad of cons. For example, once the loan is disbursed, the exporters can get immediate payments from the importers while depending on the term of the loan, there will be sufficient time to sell the goods before repayment. The drawback of using this method is that they are expensive and complex to achieve especially if you are a small businessman. If you fail to pay the loan, it can harm your credit score.
5. Open Account - In an open account transaction, the buyer is responsible to pay the seller after receiving the goods usually within 30-90 days. It means this is an import trade payment method where the payment is due until the shipped goods are received by the importers. Undoubtedly the transaction is based on the trustworthy relationship between the two parties. One of the most advantageous methods for the importers in terms of cash flow but one of the risky options for the exporters.
6. Consignment - This type of global trade payment method can be the most advantageous method for the importers. The importers make the payment to the exporters only after ensuring that the goods or imported items are sold to the end-users. It means payment is sent to the exporters when the goods are sold by the distributor to the end customer. It is considered one of the riskiest and time-taking global trade payment methods for exporters.
These are some of the profitable, secured, and reliable payment methods to ensure payment guarantees in international import/export trade transactions. Go through them thoroughly and choose one of them after being aware of their pros and cons as well as their suitability towards your business goals.