Export and import transactions do not happen without payment. Of course, the payment system used must be under the mutual agreement. Here are the 5 most common payment methods in export and import and how to choose the most secure one.
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Payment Method in Export and Import
It is common knowledge that international trade must differ from domestic payments. Here, it is important for exporters and importers to choose the type of payment method that both parties have agreed upon.
Several points are into considerations to choose the most suitable method. Its considerations, such as security, minimal risk, and relatively easy to process, and inexpensive administration, are what any trader wants.
Below, there are 5 most common payment methods in export and import activities.
1. Letter of Credit
A letter of credit acts as a guarantee from the importer that ensures payment to the exporter. Thus, the exporter can receive payment from the importer after the products and documents have been delivered.
However, the exporter does not have to wait for the importer to confirm receipt of the goods.
2. Advance Payment
In advance payment, the importer makes a payment in advance to the exporter. Whether it can be a full or partial payment.
Once the payment is clear, the company handling the export will ship the goods later.
3. Open Account
In an open account, the importer does not make a payment until the goods have reached the importer in the destination country.
Usually, a specific period is also agreed upon within which payment will be made after the importer receives the goods. This method offers advantages and security for importers.
Over here, the exporter sends goods to the importer as a deposit for sale by the importer. Both create the payment detail after the sale of goods and according to the sale value, with no guarantee.
So it is a risky payment method for exporters, as they lack ideas on how many goods will be sold and when the payment will be received.
5. Documentary Collection
With the documentary collection, payment can be made when the exporter’s bank sends payment details to the importer’s bank.
The document contains details of the cost of the goods traded. After the documents are submitted, the importing bank must immediately pay the specified fee.
There are 2 types of the document collection. The first is the document against payment (D/P) and the document against acceptance (D/A).
Which One Would be The Safest Method for Export-Import Payment?
Basically, all types of payment methods have their advantages and disadvantages. However, determining a mutually beneficial method certainly requires careful consideration.
In this case, we will divide it into 2 parts, namely in terms of importers and also in terms of exporters.
1. Exporter's Point of View
From the exporter’s point of view, advance payment is obviously the most profitable method. The reason is that the importer has to pay the fee in advance. This already guarantees that the importer will not cheat you.
The second option is a letter of credit (L/C). With a letter of credit, the bank guarantees payment for the goods. The guarantee of payment for the goods is issued if everything is under the agreement.
2. Importer's Point of View
From the exporter’s point of view, the consignment and the open account are the most profitable payment method. In an open account, you cannot pay for the goods until the goods have arrived. Also, with consignment, you can pay after the goods are sold.
The next option you can choose is the documentary collection. This is because you can pay for the goods after making sure that everything is included in the document. Also, the cost is less than using a letter of credit.
In conclusion, the safest for both importers and exporters is using Documentary Collections. However, a Letter of Credit is more common to use.