The common methods of payment are cash in advance (wire transfer or foreign check), letter of credit, documentary collection, and open account. With cash in advance payment method, you ship only after being paid. At the other end, open account means you get paid only when the shipment has arrived. In practice, most international payments are letter of credit and documentary account, both of which involve your bank and the importers foreign bank. It is important to use one of these mechanisms to protect yourself against nonpayment, as there is no equivalent of the Better Business Bureau for international transactions.
Step 7.1: Cash in Advance
The cash in advance payment method means that the exporter receives payment before shipping the product. This method is preferred by sellers because it is the least risky. Buyers are often reluctant to use this method because of its lack of flexibility.
The cash in advance method comes in three flavors: wire transfer, check, and credit card. Note that in many domestic sales, the seller can check the credit of the buyer before shipping the product, but does not charge the customer until after shipment. Also note that a check takes time to receive by mail and more time to draw from the bank of account. Exchange rate movements could occur during that time.
- Trade finance guide 1 (International Trade Administration, USDC)
- Trade finance guide 2 (Silicon Valley Bank)
- International payment instruments comparison chart (Agricultural Marketing Service, USDA)
Step 7.2: Letter of Credit & Documentary Collection
The documentary letter of credit and documentary collection involve a bank located in the importing country and a domestic bank. The importer makes a payment to the exporter when the required export documents are presented. The difference in the two methods is slight, but depends on the basis of documents. These methods of payment moderately protect both exporters and importers since the buyer's and seller's banks control document flows. However, there are fees for banking service. Typically, these fees are a percent of the transaction value.
- Sample applications for issuing irrevocable letter of credit
- Sample irrevocable letter of credit
- Sample letter of credit (Agricultural Marketing Service, USDA)
Step 7.3: Open Account
An open account transaction occurs when products are shipped and delivered before a payment is arranged. It is attractive to buyers because of its flexibility, however, it is the riskiest payment method for sellers. Foreign buyers frequently negotiate for an open account transaction, in particular if there is intense competition among exporters.
Disclaimer: This manual is a demonstration based on interviews of successful exporters. Each individual case is specific and optimal strategy may differ from those discussed here. References to sources and documents outside of WSU Extension and the IMPACT Center are for reader convenience. WSU does not review, control, or take responsibility for their content, nor does WSU or any person therein explicitly or implicitly endorse the positions or policies of these sources.
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Created December 22, 2011