Handling International Payments

Handling international payment can be complicated and risky.

There are a number of different payment methods for foreign commerce. Some are riskier than others. Be very careful about what type of international payment method you will use or accept. Remember, it's difficult to assess long distance creditworthiness and even more difficult to collect payment if your buyer or shipper defaults across an international border.

Payment in Advance
This is obviously your best bet as an exporter. The buyer sends the money by wire transfer along with the order. If you're the one wiring the money, you need to be sure about the supplier's reliability. Initially, you may want to split the cost, paying half up front and half upon delivery. Once satisfied with the supplier, you can negotiate different terms.

Commercial Letter of Credit (LC)
This common payment method offers protection to both parties. An LC is simply a letter written by the importer's bank to the exporter to verify or guarantee their ability to pay. Payment is made when the bank is satisfied that the merchandise in question has been received. This usually happens through the presentation of bills of lading or other freight documents. LCs are usually "irrevocable" once they've been sent by an importer. If what you ordered is delivered, the exporter gets paid for the goods. Next to cash in hand, an irrevocable LC is the safest form of payment in international transactions.

Open Account
Another fairly typical payment arrangement calls for the exporter to send an invoice with every shipment. The importer pays for the goods with a bank check or international money order. Small importers rarely get this kind of treatment from foreign firms, however. Similarly, exporters should be careful in granting open-account status, especially for new accounts abroad. There's a level of safety in dealing with larger companies and firms with established credit. Dealing with newer and smaller companies carries more risk.

Documents Against Acceptance
These documents are written orders addressed to a foreign buyer, which oblige the buyer to pay the amount due by a specified date. They are also known as bills of exchange. The exporter assumes much more risk with a bill of exchange because the importer already has possession of the goods. Usually, this type of transaction is used for smaller sums (from a few hundred dollars to a few thousand dollars) and for companies that have trusting relationships.