There is no point in exporting if you don't get paid for your products. Therefore it's important to select the appropriate payment method to minimize the payment risk while also accommodating the needs of the buyer.
As I pointed out in a previous article, there are five primary methods of payment for international transactions. This article focuses on the cash-in-advance option.
With the cash-in-advance payment method, exporters can eliminate credit risk or the risk of non-payment since payment is received prior to the buyer assuming ownership of the goods. That makes it the most secure and least risky method of international trade for exporters. Payment is usually received by wire transfers and credit cards, although escrow services are becoming another cash-in-advance option for small export transactions.
However, requiring payment in advance is the least attractive option for the buyer since it can cause cash-flow problems. Therefore it's often not a competitive option for the exporter especially when the buyer has other vendors to choose from. In addition, foreign buyers may be concerned that the goods may not be sent if payment is made in advance.
Exporters who insist on cash in advance as their sole payment method for doing business internationally may lose out to competitors who are willing to offer more attractive payment methods.
Cash-In-Advance Payment Methods
There are four typical cash-in-advance payment methods that international sellers and buyers may agree to use:
An international wire transfer is the most secure and preferred method for exporters to receive payment in advance. It is commonly used and almost immediate.
Exporters should provide clear routing instructions to the importer when using this method including the receiving bank's name and address, SWIFT address, and ABA number, as well as the seller's name and address, bank account title, and account number. The fee for an international wire transfer can be paid by the sender (importer) or it can be deducted from the receiver's (exporter's) account.
Exporters who sell directly to foreign buyers may select credit cards as a viable cash-in-advance option, especially for small consumer good transactions. Exporters should check with their credit card companies for specific rules on international use of credit cards. The rules governing international credit card transactions differ from those for domestic use.
Because international credit card transactions are typically placed using the web, telephone or fax, which can facilitate fraudulent transactions, exporters should take proper precautions to determine the validity of transactions before the goods are shipped.
Although exporters must tolerate the fees charged by credit card companies and assume the risk of unfounded disputes, credit cards may help the business grow because of their convenience and wide acceptance.
Exporters may select escrow services as a mutually beneficial cash-in-advance option for small transactions with importers who demand assurance that the goods will be sent in exchange for advance payment. Cross-border escrow services are offered by international banks and firms that specialize in escrow and other deposit and custody services.
Escrow protects both exporters and importers by placing funds in the hands of a trusted third party until a specific set of conditions are met. A typically escrow transaction follows these steps:
- The importer sends the agreed amount of money to the escrow service.
- After payment is verified, the exporter is instructed to ship the goods.
- Upon delivery, the importer has a predetermined amount of time to inspect the goods.
- Once accepted, the funds are released by the escrow service to the exporter.
The escrow fee can either be paid in full by one party or split evenly between the two.
Payment by Check
Getting paid by check is the least attractive cash-in-advance method. A check drawn on the importer's account and mailed to the exporter results in a lengthy collection delay of several weeks to months. That delay defeats the original intention of receiving payment before shipment.
If the check is in U.S. dollars and drawn on a U.S. bank, the collection process is the same as it would be for any U.S. check. However, funds deposited by non local checks, especially those totaling more than $5,000 on any one day, may not become available for withdrawal up to 10 business days due to federal regulations.
In addition, if the check is in a foreign currency or is drawn on a foreign bank, the collection process can become more complicated and can significantly delay the availability of funds. Moreover, if shipment is made before the check is collected, there is risk that the check may be returned due to insufficient funds in the buyer's account or even because of a stop-payment order.
When to Use Cash-In-Advance
While many U.S. companies have a strict cash-in-advance payment requirement for their international sales, more sophisticated exporters understand the importance of evaluating both the company and the country with whom they are doing business and finding the appropriate risk-reward trade off.
Here are some factors that may make the cash-in-advance option more appropriate:
- The importer is a new customer and/or has a less-established operating history.
- The importer's creditworthiness is doubtful, unsatisfactory or unverifiable.
- The political and commercial risks of the importer's home county are very high.
- The exporter's product is unique, not available elsewhere, or in heavy demand.
- The exporter operates an internet-based business where the acceptance of credit card payments is a standard way of conducting business transactions.
This article is taken in large part from the Trade Finance Guide: A Quick Reference for U.S. Exporters, which you can download for free by clicking the link below.