The world today has been too very advanced for us to stay cooped up within our geographical boundaries. The world today is often called a digital village.
The distance between people has been reduced to a two-second call from miles of traveling.
In such a situation it would be a great loss for all the entrepreneurs and businesses to not think global. In order for us to take globally, we must be aware of the methods through which our money can be e sent abroad.
Letters take a look at the five main types of the methods that are used:
Topic in This Article
International payment methods
1. Cash in advance
Cash in advance is literally what it means in plain English. It is also widely known as prepayments.
These types of transfers a typically made by wire transfers or credit cards. Regardless close to being the most popular ways there are plenty of other payment methods that are used like debit card transfer, telegraphic transfer, and international cheque.
A cash advance is customarily used only for small purchases.
While this may be a fascinating option for the sellers it presents a significantly higher risk for the buyers. There is no guarantee to the buyer that the goods will definitely arrive and even if they do arrive they would be in good condition.
Thus, it is recommended for sellers who are dealing with new buyers or buyers with free credit ratings while they are buying high-value products.
2. Letters of Credit
Letters of Credit (LCs) are one of the most secure international payment methods available to traders. The letter of credit is a commitment given to the exporter by the bank on behalf of the buyer that the payment will definitely be made given that the terms and conditions stated in the LC have been met by the buyer as well as all the required documents have been presented and verified.
The transaction is made through both the buyer as well as the seller’s banks. Once the trade terms and conditions have been confirmed the buyer instructs his bank to pay the agreed amount of some to the seller’s bank. After that, the buyer’s bank sends a letter of credit as proof of sufficient and legitimate funds to the seller’s bank. The payment is only limited to the seller’s personal account after all the conditions stated are met by both parties and the shipment has been shipped.
3. Documentary collection
A Documentary collection (D/C) is an instrument where the exporter entrusts the payment collection for any trade to its Bank that is the remitting bank, which sends the documents that it’s a client is the buyer needs to the importer’s bank, that is the collecting bank with instructions to release the documents to the buyer for the payment.
The important main of the rights over the goods is if the imported has the shipping documents.
Documents have been released to the buyer only after the payment has been made.
This can be done in two ways:
Documents against payment
Funny physical or financial assets the bank with then presents them to the imported after the payment has been cleared.
It the important than one can use documents to take possession of the merchandise.
The risk for the exporter is that the important will refuse to pay even though the important won’t be able to collect the goods and the exporter has very little recourse to get back the money.
The steps are as follows
- The contract is negotiated and confirmed by both parties.
- After the exporter has shipped the shipment it gives the bank all the documents confirming the transaction.
- The exporter’s banks give the documents to the importer’s bank.
- Importers Bank requests payment from the buyer presenting the documents.
- The importer pays his bank
- The important Bank sends the payment to the exporter’s Bank.
- The exporters get the money.
Documents against acceptance
The exporter’s Bank instructs the importance Bank to release the transaction on behalf of the exporter after giving the documents to the important.
Here are the steps:
- The contract is negotiated and confirmed by both parties.
- The exporter ships the merchandise.
- The exporter presents the documents of shipment to his bank.
- The export is Bank forwards the documents to the importance Bank.
- The important Bank requests the payment from the buyer by presenting the documents.
- The important makes the payment, receive the documents, and collect the merchandise.
- The importance Bank paste the exporter’s bank and his bank finally pays the exporter.
4. Open account
An open account is a trade in which the merchandise is shipped and delivered before the payment is due. It is usually for a time span of 30 days 60 days or 90 days.
It is one of the most preferred and advantageous options for the important but heavily risky on the exporter’s side.
The buyers abroad often want exporters to offer open accounts because it is much more customary in other countries as the payment after the received structure is better.
5. Consignment
Caution mint is synonymous with an open account in many ways but the payment is sent to the exporter only after the merchandise has been sold by the important distributor to the end customer. However, the exporter retains ownership of the goods until they are sold to the end customers. It is extremely risky since the exporter is not guaranteed any payment. Regardless, this method helps the exporters to become more competitive because the goods are available in the market faster. Increases the pace of trading but also selling on consignment reduces the exporter’s cost of storing in inventory.
Consignment is not recommended for buyers and sellers who do not have a trusting relationship or do not have reputable distributors and providers. Given the risk involved it should be managed by the sellers by having adequate insurance coverage that can cover both the goods from transit to the final trade as well as mitigate any damages caused in the event of nonpayment by the buyer.
There are many trading instruments available when it comes to international trade. It is necessary we understand and manage the risk that comes with the services. However, it would be a great loss to not think globally on account of a little risk.
We hope that you found all your answers regarding international payments and transfer methods here.
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