Basically, there are different payment methods in international trade. For exporting and importing goods, advance payment is one of the most popular payment methods.
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Definition of Advance Payment in International Trade
Advance payment is a payment method where the buyer pays the seller first before the seller ship the goods. The buyer, or an importer, must first pay the seller or exporter for the goods to be purchased.
After the importer has paid, the exporter will immediately process the shipment of the goods. They usually process the payment through a bank transfer system.
In this process, both parties can negotiate the amount to be paid. Importers can pay half or directly the full amount.
Benefits of Using Advance Payment in Export and Import
The following are some benefits of advance payment for importers and exporters, including:
1. Guaranteed Payment for Exporters
When you use the advance payment, the funds are automatically in the hands of the seller/exporter. Henceforth, these funds can meet other needs, such as capital, production costs, etc.
2. Ease of Management
Second, managing transactions through the advance payment system is also very convenient. Also, you can directly transfer your money to the buyer after completing all negotiations.
Moreover, you do not have to deal with other third parties that can take a lot of time, such as letters of credit.
Risks of Advance Payment in Export and Import
Apart from the advantages, the advance payment method also has disadvantages.
1. Lack of Guarantee for Importers
First, because the importer can transfer the funds to the buyer. However, this poses a significant risk if something unexpected happens.
For example, if the goods do not meet the demand, or even worse, if the importer cheats on the delivery of the goods.
In this case, it will be difficult for the importers to recover their money from the exporters. This incident would be different if the payment system used was documentary collection.
2. Trust Between The Parties
Based on the risk mentioned in the first point, you can not apply this method to everyone. Therefore, advance payments are usually made by parties who have known each other or have transactions before.
Procedure of Advance Payment in International Trade
Generally, the advance payment method proceeds as follows:
1. Payment Negotiation
First, you must negotiate the amount to be paid. Choose whether you pay half or part of the total amount initially.
For partial payments, determine the percentage of the amount paid upfront and after you receive it. Usually, there is a 50:50 split, it could also be 25:75.
2. Goods Insurance
Second, you must discuss the warranty for the goods. This warranty is important if the goods delivered are not up to par.
It relates to the quantity, quality, or late delivery of the goods. What consequences can you take in such a case so that you are not harmed by unreliable buyers.
3. Count Other Payments In
Besides the cost of goods, do not forget to calculate the cost of other expenses. For example, insurance documents, shipping, loading and unloading, and any applicable taxes.
In summary, while the advance payment method is beneficial to the exporter, it is risky for the importer.
Unless the exporter and importer already know and trust each other, other options such as a letter of credit or documentary collection are usually the main options.