Cash-in-advance payment terms
Receiving cash in advance of goods being shipped is seen as a low-risk global payment method and, therefore, the most desired by exporters and e-commerce businesses, especially if the risk of non-payment is high. There is no risk of default, and the exporter can provide a refund or credit without concern about the payment being withheld.
Cash payments, debit card payments (visa or MasterCard), direct debit, wire transfers, bank transfers, escrow services, e-wallets, credit card payments, digital payments and smart cards are commonly used. Alternative payment methods include telegraphic transfers, paper checks and automated clearing house payments.
There are a few pros and cons to this method. The customer or distributor may not be able to make payment in cash in advance as paying cash for goods can impact cash flow negatively. Buyers may be concerned that they will not receive their goods, which means that businesses trading on cash-in-advance terms only may lose customers to competitors with more flexible payment terms.
Credit payment terms
Under credit payment terms, businesses can pay for goods several weeks or months after receiving them. Open account and consignment terms are the most common credit payment methods in international trade.
Open account transactions are sales where goods are shipped and delivered before the payment is due. These terms are typically 30, 60, or 90 days in international sales. This is an advantageous payment option for payers (especially in terms of their cash flow and cost) but a high-risk option for the seller. Consider this option alongside the importance of your SaaS positioning.
This doesn’t mean open accounts are not commonplace, however. Open account terms are quite common abroad, and exporters who aren’t willing to explore this option risk losing sales to competitors. Exporters will usually mitigate the risk of non-payment through export credit insurance or other trade finance techniques.
Consignments are a variation of the open account terms. Payment is sent to the exporter after goods have been sold to the end customer by the foreign distributor. International consignments are based on contractual arrangements whereby the distributor receives, manages, and sells goods on behalf of the exporter.
Exporters are not guaranteed payment, and their goods are out of reach in the hands of a foreign distributor or agent, which poses considerable risk. However, goods are readily available and ready for rapid delivery in the market, which comes with considerable brand and business benefits. It can also reduce the cost of storing and managing inventory.
The key is to always partner with a trusted distributor and ensure that the appropriate insurance is in place for goods in transit or in possession of the third party.
While individuals and business entities may be hard to trust at times, banks are financial institutions, synonymous with international compliance, security, and credibility. Companies that have doubts about a foreign buyer but are satisfied with the reputation and creditworthiness of the buyer’s bank may use payment methods that include letters of credit (LCs) or documentary collection (D/C).
A bank will guarantee payment for a customer's purchase, as long as all requirements are met and documented, by issuing a letter of credit. The buyer establishes credit and makes payments to their bank account to utilize this service. A letter of credit offers the buyer protection, as there is no payment obligation until the goods have been shipped according to the terms of the agreement.
Unfortunately, this method is expensive and time-consuming, during which time currency fluctuations can negatively impact profit margins.
In documentary collection, the exporter's bank (the remitting bank) is responsible for collecting the payment for the sale, and sends the relevant documents to the importer's bank (the collecting bank) for the money to be released. The importer's funds are then sent to the exporter.
In this scenario, the bank acts as a facilitator, but they do not offer verification or recourse for non-payment. This method is less costly than letters of credit, but there are significant risks, including the risk of paying return transport costs if the buyer becomes unwilling or unable to pay.