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What is the best payment method for your international business?

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If you run an international business, you know that choosing the right payment method can make or break your trade deals. Different payment methods have different advantages and risks, depending on your relationship with your buyer or seller, the amount and frequency of transactions, the currency and exchange rate fluctuations, and the legal and regulatory frameworks of the countries involved. In this article, we will compare four common payment methods for international trade: advance payment, letter of credit, documentary collection, and open account. We will also give you some tips on how to negotiate the best payment terms for your business.

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Millie QIU ?????

???? Trade Operation & Trade Finance for SMEs | Harnessing Two Decades of International Trade and Business Acumen

1 Advance payment

Advance payment is the simplest and safest payment method for the exporter, but the riskiest and most expensive for the importer. It means that the importer pays the full amount of the goods or services before they are shipped or delivered. This way, the exporter does not have to worry about non-payment, fraud, or credit issues. However, the importer has to bear the cost of financing the payment, and may lose the money if the exporter fails to deliver the goods or services as agreed. Advance payment is usually used for small or one-time transactions, or when the exporter has a strong bargaining position or a unique product.

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Millie QIU ?????

???? Trade Operation & Trade Finance for SMEs | Harnessing Two Decades of International Trade and Business Acumen
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I am afraid I have to say: There is no best payment method for any international transactions, from my understanding and experience. What risks around any payment method are all stakeholders able to assess and capable to bear for the transaction only or promising business relationship/cooperation? A few things to start consideration with: >cargo insurance >credit insurance >quality assurance phases >forwarder process by what party's instruction >goods title and transfer >transportation execution and handling >cash flow cycle and demand >knowledge/resources/financial institution of each kind of payment method A "real" process often being neglected: What banking account the vendor use to receive money?! I wish to share cases and stories!

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2 Letter of credit

Letter of credit is a widely used payment method that involves a third party, usually a bank, that guarantees the payment from the importer to the exporter. The bank issues a letter of credit to the exporter, which specifies the conditions and documents that the exporter must provide to receive the payment. The bank then pays the exporter when the documents are presented and verified, and collects the payment from the importer. This way, the exporter reduces the risk of non-payment, and the importer reduces the risk of non-delivery or poor quality. Letter of credit is suitable for large or complex transactions, or when the exporter and importer have limited trust or experience with each other.

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3 Documentary collection

Documentary collection is a payment method that also involves a third party, usually a bank, but does not guarantee the payment. The exporter ships the goods to the importer, and sends the documents that prove the ownership and delivery of the goods to their bank. The bank then forwards the documents to the importer's bank, which releases them to the importer only when the payment is made or accepted. The importer then pays the exporter directly or at a later date, depending on the terms of the transaction. This way, the exporter retains control of the goods until the payment is secured, and the importer has more flexibility and lower costs than letter of credit. Documentary collection is suitable for medium-sized or regular transactions, or when the exporter and importer have some trust and familiarity with each other.

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4 Open account

Open account is the simplest and cheapest payment method for the importer, but the riskiest and most demanding for the exporter. It means that the exporter ships or delivers the goods or services to the importer, and then invoices them for the payment. The importer then pays the exporter according to the agreed terms, which may range from immediate to several months. This way, the importer does not have to pay upfront or incur any financing or banking fees, and can inspect and verify the goods or services before paying. However, the exporter has to bear the risk of non-payment, fraud, or default, and may have to manage the cash flow and credit issues. Open account is usually used for small or frequent transactions, or when the exporter and importer have a long-term and stable relationship.

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5 Negotiating payment terms

Choosing the best payment method for your international business depends on various factors, such as objectives, preferences, capabilities, constraints, market conditions, competitive environment, legal and regulatory requirements, and cultural and ethical norms. To negotiate the best payment terms for your business, it is important to assess the risks and benefits of each payment method for both parties. Additionally, you should communicate clearly and transparently with your trading partner and seek professional advice from experts such as trade finance specialists, lawyers, or accountants. Furthermore, you should use reputable and reliable intermediaries such as banks, agents or brokers. Lastly, review and update your payment terms regularly based on performance and feedback.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What is the best payment method for your international business?

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1 Advance payment

2 Letter of credit

3 Documentary collection

4 Open account

5 Negotiating payment terms

6 Here’s what else to consider

Import/Export Operations

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What is the best payment method for your international business?

1

2

3

4

5

6

1 Advance payment

2 Letter of credit

3 Documentary collection

4 Open account

5 Negotiating payment terms

6 Here’s what else to consider

Import/Export Operations

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