There are a few options for payment when negotiating an international transaction.  In deciding which type of payment method you would like there are three specific criteria to take into consideration: payment risk, client account acquisition ease, and payment timing.  Payment risk is the “real” possibility of never getting paid for a shipment, in other words, there are payment methods that constitute a very high risk of a default payment.  Client account acquisition ease is a factor that “enables” an international sale.  Providing terms of payment that are beneficial for a buyer can be a deciding factor for closing a deal.  Finally, the timing of payment varies based upon the method of payment negotiated.

The basic categories of export sales payments include Consignment, Open Account (O/A), Collections, Letters of Credit and Cash-in-Advance.

Consignment– the highest risk method for an exporter- is when an exporter sends goods to a foreign entity (distributor) and gets paid once the products sell in the foreign country.  Consignment can be a very advantageous way to close a sale, be more market competitive and reduce costs of inventory storage, however, the possibility of nonpayment is very high if the seller does not both ensure that the foreign distributor is reputable and that the goods shipped will be sold.

Open Account (O/A)– also high risk for an exporter- is when a seller receives payment for goods shipped and delivered in 30, 60 or 90 days. In essence, this type of payment provides a credit line for the buyer.

Documentary Collection also is known as Collections is a medium risk method for a seller.  Collections is a process where the seller receives payment via banking channels.  The seller’s bank sends appropriate documentation to the buyer’s bank with payment instructions.  The buyer then remits the funds upon exchange of documentation.  Similar to an escrow transaction.  The difficulty in this type of payment is that the bank has no control over default payments, should the buyer wish to cancel the sale they can do so with little recourse.  In other words, they can decide not to buy goods already shipped.

Letters of Credit– lower risk for an exporter is a is when a foreign buyer’s bank is a type of guarantor for payment. Payment is made as long as the terms and conditions of the L/C are met and documentation provided.  The most important thing in this type of payment method is to ensure that the international financial institution is indeed a reputable high standing banking entity.

Cash-in-Advance– lowest risk for an exporter is when a seller receives prepayment for goods.  Payment is collected via credit card, wire transfer or internet escrow services. While a more secure means of attaining payment it is also the least competitive.  Sellers who rely on prepayment may not be able to expand international sales as rapidly.

Careful consideration needs to be taken on choosing the appropriate payment method, and detailed review of a buyer’s financial standing, reputation, and long-term business potential should be carefully examined before deciding.