For an exporter, any sale is a gift to the buyer until he receives the payment. Therefore, an exporter wants to receive the payment as soon as an order is placed or before the goods are delivered to the importer. For an importer, any payment is a donation until he receives the goods. Therefore, an importer wants to receive the goods as soon as possible but wants to delay payment as long as possible. And to succeed in today’s global marketplace and win sales against a foreign competitor, an exporter must offer his customer attractive sales terms and the appropriate payment method. Let's try to understand the simplest method 'direct payments' in the international market.
The first one is 'Cash-in-Advance'. Under this payment term, an exporter can avoid all kinds of credit risks because payment is received before the ownership of the goods is transferred to the buyer. In international markets, wire transfers and credit cards are the most commonly used cash-in-advance options available to the exporters. Nowadays, 'escrow services' are becoming another cash-in-advance option for small export transactions. However, cash in advance is the least attractive option for the buyer, because it is highly risky. The importers are also concerned that the goods may not be sent when payment is made in advance. Thus, exporters, who insist on this payment method as their sole manner of doing business, may lose to competitors who offer more attractive payment terms like 'open account'.
An 'open account' transaction is a sale where the goods are shipped and delivered before payment is done, which in international sales is typically done in 30, 60 or 90 days. Obviously, this is one of the most advantageous options for the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. Exporters can offer competitive open account terms while substantially mitigating the risk of non-payment by using one or more of the appropriate trade finance techniques covered later in this guide. When offering open account terms, the exporter can seek extra protection using export credit insurance.
The last direct payment option is -'Consignment', in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment and its goods are in a foreign country in the hands of an independent distributor or agent. Consignment helps exporters become more competitive on the basis of better availability and faster delivery of goods. Selling on consignment can also help exporters reduce the direct costs of storing and managing inventory. The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance should be in place to cover consigned goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment.
Getting paid in full and on time is the ultimate goal for each export sale. With the help of Ximpex, an appropriate payment method can be chosen to minimize the payment risk while also catering to the needs of the buyer.
Author: Sachin Yadav Co-Author: Lisa Goel
Information source:- "export.gov"