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What are the key considerations when selecting a payment method for international trade?

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Selecting a payment method for international trade is a crucial decision that affects the cash flow, risk, and profitability of your logistics business. Different payment methods have different advantages and disadvantages, depending on the nature of the transaction, the relationship between the buyer and the seller, and the legal and regulatory environment of the countries involved. In this article, you will learn about the key considerations when choosing a payment method for international trade, and the main types of payment methods available.

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Calebe E. R.

Especialista em Logística e Supply Chain Management | Especialista em Engenharia da Qualidade | Lean Six Sigma Black…
KUNAL BHAT , PMP

SAP S4/HANA Solution Architect | SAP MM IBP FI PP | Supply Chain Expert | Drove 40% Process Efficiency with SAP IBP and…

1 Cash in advance

Cash in advance is the simplest and most secure payment method for the seller, as it eliminates the risk of non-payment or default by the buyer. The seller receives the full payment before shipping the goods, and has full control over the transaction. However, cash in advance is also the most risky and costly payment method for the buyer, as it exposes them to the risk of non-delivery or fraud by the seller. The buyer also has to bear the cost of financing the payment in advance, and may lose the opportunity to negotiate better terms or prices with the seller. Cash in advance is usually used for small or low-value transactions, or when the buyer has a poor credit rating or a history of default.

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Calebe E. R.

Especialista em Logística e Supply Chain Management | Especialista em Engenharia da Qualidade | Lean Six Sigma Black Belt | Almoxarifado | Eficiência Logística | Rotinas Logísticas
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Considere a seguran?a financeira, pois o pagamento é feito antecipadamente antes da entrega dos bens ou servi?os. Avalie o risco de inadimplência do comprador e a necessidade de capital de giro para financiar a produ??o ou aquisi??o dos produtos .

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2 Letters of credit

Letters of credit are the most common and widely used payment method for international trade, as they provide a high level of security and convenience for both the buyer and the seller. A letter of credit is a document issued by a bank on behalf of the buyer, promising to pay the seller a specified amount upon the presentation of certain documents, such as the bill of lading, the invoice, and the certificate of origin. The bank acts as a third-party guarantor, ensuring that the seller receives the payment if they comply with the terms and conditions of the letter of credit, and that the buyer receives the goods if they pay the bank. Letters of credit are suitable for large or complex transactions, or when there is a lack of trust or familiarity between the buyer and the seller.

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Calebe E. R.

Especialista em Logística e Supply Chain Management | Especialista em Engenharia da Qualidade | Lean Six Sigma Black Belt | Almoxarifado | Eficiência Logística | Rotinas Logísticas
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Verifique a garantia de pagamento, pois uma institui??o financeira se compromete a pagar ao exportador após a entrega dos documentos exigidos. Considere os custos associados à emiss?o e à confirma??o da carta de crédito, bem como os prazos para recebimento dos fundos .

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3 Documentary collections

Documentary collections are a payment method that involves the exchange of documents between the buyer and the seller through their respective banks. The seller ships the goods and sends the documents, such as the bill of lading, the invoice, and the certificate of origin, to their bank, which then forwards them to the buyer's bank. The buyer's bank releases the documents to the buyer upon the payment of the amount due, or upon the acceptance of a draft or a bill of exchange. The buyer then uses the documents to claim the goods from the carrier. Documentary collections are less secure and less expensive than letters of credit, as they do not involve a bank guarantee or a verification of the documents. Documentary collections are suitable for medium-value transactions, or when there is a moderate level of trust or familiarity between the buyer and the seller.

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Calebe E. R.

Especialista em Logística e Supply Chain Management | Especialista em Engenharia da Qualidade | Lean Six Sigma Black Belt | Almoxarifado | Eficiência Logística | Rotinas Logísticas
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Analise a confiabilidade do comprador, pois o pagamento ocorre após a apresenta??o dos documentos de embarque. Certifique-se de que os documentos exigidos s?o precisos e completos para evitar atrasos ou recusas de pagamento .

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4 Open account

Open account is the most flexible and convenient payment method for the buyer, as it allows them to receive the goods and pay the seller at a later date, usually within 30 to 90 days. The seller ships the goods and sends the invoice to the buyer, who then pays the seller according to the agreed terms and conditions. Open account is also the most risky and least favorable payment method for the seller, as it exposes them to the risk of non-payment or delay by the buyer. The seller also has to bear the cost of financing the credit extended to the buyer, and may lose the leverage to enforce the contract or resolve disputes. Open account is usually used for high-value transactions, or when there is a high level of trust or familiarity between the buyer and the seller.

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5 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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KUNAL BHAT , PMP

SAP S4/HANA Solution Architect | SAP MM IBP FI PP | Supply Chain Expert | Drove 40% Process Efficiency with SAP IBP and APO | Process Re-engineering & SAP Integration | Process Optimization & System Integration
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When selecting a payment method for international trade, key considerations include the level of trust between buyer and seller, the nature of the transaction, associated costs, and the risk appetite of both parties. Common options include letters of credit for secure transactions, open account terms for established relationships, and advance payments for lower-risk deals. Currency exchange rates, regulatory compliance, and the speed of transaction processing also play crucial roles in decision-making. Balancing security, cost-effectiveness, and convenience ensures a smooth and mutually beneficial international trade process.

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What are the key considerations when selecting a payment method for international trade?

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1 Cash in advance

2 Letters of credit

3 Documentary collections

4 Open account

5 Here’s what else to consider

Logistics Management

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What are the key considerations when selecting a payment method for international trade?

1

2

3

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5

1 Cash in advance

2 Letters of credit

3 Documentary collections

4 Open account

5 Here’s what else to consider

Logistics Management

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