This report explains the different methods of getting paid and the different levels of risks involved in international trade payment. At first it will examine the different types of payment and finance method from the seller’s and buyer’s point of view. Secondly this report will investigate how these payment methods are practiced for international trade in Bangladesh.
Getting paid for providing goods or services is critical for any business. However, getting paid for an international transaction can be a very different experience from securing payment on business with other domestic entities, due to the number of extra factors that can influence the process.
None of the methods mentioned in this essay will completely eliminate the payment risks associated with international trade. That is why it is very important to understand how these payment methods work very well and consider the preferred payment option with care and hedges the risks along with appropriate credit insurance and credit check on the customers.
Popular Payment Methods in International Business
There are many ways to make and receive payment in international trade. Due to the physical distances between buyer and seller, and the fact that the transaction may have taken place without the two parties actually meeting, minimizing exposure to risk is on the minds of both parties. The buyer wants to make sure they receive their order in acceptable condition and on time, and the seller needs to know they will get paid for it. The most popular methods for international trade and finance are:
• Advance Payment
• Open Account
• Bills for Collection
• Letters of Credit (L/Cs)
Advance Payment: This is the most secure method of trading for exporters and, consequently the least attractive for buyers. Payment is expected by the exporter, in full, prior to goods being shipped. It is the easiest and cheapest form of trade payment method. Documents like airway bills, commercial invoices and packing lists are normally being sent to the importer along with the shipment so that the importer can clear the customs and pick up the goods. Shipping happens only after money is safely in exporter's bank account. With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters.
However, requiring payment in advance is the least attractive option for the importer, because it creates cash-flow problems. Importers are also concerned that the goods may not be sent if payment is made in advance. For this reason it is very popular between buyers and sellers who have already established a mutual trust, as this negates the associated risks and let them enjoy this hassle-free and very low transaction costs since no financial intermediaries are involved in this process.
There are no universally accepted regulations to guide cash-in-advance and the basis of guidance of this method is normally the purchase/sale agreement or the mutual trust between the exporter and the importer.
Open Account: The least secure method of trading for the exporter, but the most attractive to buyers. Goods are shipped and documents are remitted directly to the buyer, with a request for payment at the appropriate time (immediately, or at an agreed future date) which is usually 30 to 90 days. An exporter has little or no control over the process, except for imposing future trading terms and conditions on the buyer. Clearly, this payment method is the most advantageous for the importer, in cash flow and cost terms.
The main drawback of open account method is that exporter assumes all the risks while the importer gets the advantage over the delay use of company’s cash resources and is also not responsible for the risk associated with goods. However, the financial...
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