When you trade internationally, you need to know the different payment terms and methods that you and your trading partners can use. Payment terms and methods are the agreements and processes that govern how and when the payment for the exported or imported goods is made. They affect your cash flow, risk, and cost.
There are five main types of payment terms and methods:
- Cash in advance: This is a payment method where the importer pays a percentage of the invoice before the goods are shipped or delivered, and the remaining percentage after the goods are shipped or delivered. The percentage of the advance payment and the payment after shipping may vary depending on the agreement between the exporter and the importer. For example, the importer may pay 50% of the invoice before the goods are shipped, and the remaining 50% after the goods are shipped. This method reduces the risk of non-payment for the exporter, but also reduces the risk of non-delivery for the importer.
- Letter of credit: The importer’s bank guarantees the payment to the exporter upon the presentation of certain documents. This is common and secure for both the exporter and the importer.
- Documentary collection: The exporter’s bank sends the documents related to the shipment to the importer’s bank, with instructions to release the documents to the importer upon the payment or acceptance of a draft. This is less secure but cheaper for both the exporter and the importer.
- Open account: The exporter ships or delivers the goods to the importer before the payment is due, usually within 30 to 90 days. This is the least secure for the exporter, but the most secure and convenient for the importer.
- Consignment: The exporter retains the ownership of the goods until they are sold by the importer to the end customer. The exporter does not receive the payment until the sale is made, and the importer does not have to pay for the goods until they are sold. This is a special method for perishable goods, seasonal goods, or new products.
Payment terms and methods are essential for the success of your international trade transactions. By knowing and choosing the best payment terms and methods, you can optimize your cash flow, minimize your risk, and maximize your profit. Happy trading! 😊