What are the main methods of payment in international business?

Businesses send money overseas for many reasons. They may be for ordering goods, giving employees their salary, or even paying customers if they are in sectors like pensions or insurance, for example. However, there are multiple ways in which they can make these international payments. Here we will outline the main methods.

Letters of credit

A letter of credit (also known as LC, bankers’ commercial credit or documentary credit) is a document from a bank that promises that a payment will be processed, making it one of the most secure international payment methods. The transfer is facilitated by both the buyer and sellers’ banks once the trade’s terms and conditions have been confirmed and met, and the shipment has been dispatched. Only businesses that have the required assets or credit will get approved for a letter of credit.

This method of payment benefits both parties. Buyers know that all terms and conditions have been met and the shipment is on its way before they need to pay, while sellers have advance proof the customer can afford the goods, making it low risk. Furthermore, the buyer’s bank will have to cover the payment if they default, providing extra security.

Documentary collections

Documentary collections (otherwise known as bills of exchange) also involve both the buyer’s and seller’s banks, but there is no need for proof of funds. With this method, all the documents required to make the trade are submitted to the buyer’s bank along with payment instructions. However, the documents are only released to the buyer in exchange for payment. Therefore, it’s effectively the responsibility of the seller’s bank to collect the money by passing on the necessary documents.

This is cheaper than a letter of credit, but not quite as secure because there’s no verification involved and no protection if the buyer decides to cancel.

Open account

Businesses shipping goods abroad may do so via an open account, which is where the product is sent out before payment is taken. This is effectively credit, with the buyer typically getting 30, 60 or 90 days to make the payment.

Open accounts are beneficial for the buyer and usually good for their bottom line due to positive cash flow. However, this can be risky for the seller as there’s a chance they won’t be paid for their services. That’s why open accounts are only recommended for low-value exports going to trustworthy buyers.

Consignment

Consignment is similar to the open account method but the international payment is only made once the buyer receives the goods and has sold them to the end consumer. Essentially, the original seller retains ownership up to this point.

Consignment is risky because the seller isn’t guaranteed payment, so it’s important they only work with trustworthy buyers and make sure they’re properly insured. On the other hand, this method also means the goods are ready to be sold quicker and reduces the seller’s costs of storing inventory.

Cash in advance

Cash in advance simply means that the buyer pays the seller for the goods before they are shipped. There are many ways to do this, but these are the most common methods:

• Credit or debit card payment
• International wire transfer
• International bank cheque

This is the safest option for sellers as it guarantees they will be paid before they release the shipment, but not so good for buyers who risk not receiving the goods and suffering from disadvantageous cash flow. It’s not recommended that sellers offer this as the only international payment method as this will make them less competitive. However, it is good to offer cash in advance solutions for small purchases, high-valued products, or trades involving new buyers or those with weak credit ratings.

In addition to trade, these cash in advance methods are also used to make other kinds of international business payments. For example, an engineering company in Germany may need to pay different consultants in Thailand, the UK and Australia in their local currencies. However, these traditional solutions can often be problematic when it comes to making cross-border payments. High fees, slow delivery times, and complicated user interfaces are just a few of the issues businesses may encounter when trying to process such transactions.

Inpay’s alternative international payment solution

Inpay teams up with corporations to facilitate their international payments with a range of products. These alternative cross-border solutions offer a cheaper, quicker, more secure means of transferring money overseas.

Cross-border payouts

Inpay’s regulated cross-border payouts can be delivered to over 100 countries for a fraction of the price of traditional banking. Direct access to domestic clearing channels also means money is transferred much quicker than usual, while the cutting-edge technology involved makes the process as simple and efficient as a domestic bank transfer. What’s more, beneficiaries will always receive funds in local currency in real-time without any deductions.