If you are in business -any business- whether domestic or international, getting paid for your products or services is paramount to your business survival, growth and success. Ultimately, any sale is a gift until you get paid.  So understanding how to get paid for an export sale is especially important, since your buyer could be 10,000 miles away.

There are four basic ways to get paid for an international order. From the most, to the least, secure method of payment for the exporter, these are:

Cash-in-advance.  New exporters frequently request this method.  Their attitude typically is, “I don’t know you very well but, if you send me the money, I’ll send you the goods.”

• Advantage: The exporter gets paid before the shipment leaves the U.S.
• Buyer’s Perspective: It is high risk. My money is gone, and all I have is the exporter’s promise to deliver.
• Disadvantage: It limits the exporter’s sales potential, is non-competitive, and ties up the importer’s cash.

Letter-of-credit. Documentary letters of credit (L/C) substitute the creditworthiness of the importer and exporter with that of their respective banks.

• Advantage:  The exporter will be paid if the terms and conditions of the L/C are met.
• Buyer’s Perspective: The funds won’t be released until shipment is made and terms met.
• Disadvantage: There are fees associated with opening and amending L/C; the importer’s cash is tied-up.

Documentary collections.  This method uses the banking system to send documents to the importer to request payment.

•  Advantage: The goods are not released to the importer until the importer pays or agrees to pay for the goods.
• Buyer’s perspective: Payment is delayed until goods are delivered or close to being delivered.
• Disadvantage: There is no guaranty of payment; importer could refuse goods; banks only act as intermediaries for collections.

Open account. Open account terms for international sales are similar to domestic open account sales. The buyer agrees to pay in a set number of days—typically 30, 60, or 90—from the invoice, shipment or delivery date.

• Advantage: More competitive terms which can help secure larger orders.
• Buyer’s perspective: May allow the buyer time to sell the goods prior to payment; does not tie up importer’s cash.
• Disadvantage: The goods are gone and the buyer might not pay. This risk can be greatly reduced by obtaining credit insurance from the Export-Import Bank of the U.S. on the foreign accounts receivable. Cost for credit insurance can be minimal, viz. about 65 cents per $100 of the invoiced amount for a policy that provides 95% coverage. (Visit: www.exim.gov for details.)

The method of payment used is frequently a result of perceived country and commercial risk, competition, and what is normal in a particular country or region.  While letters of credit are common in parts of the Middle East or Asia, they are used less frequently in Europe and requiring them for payment could well reduce an exporter’s competitiveness in some markets.

In addition to the above considerations when requesting a particular method of payment, the exporter also should evaluate what impact the payment method will have on its own working capital financing needs.  We’ll discuss that in our next installment.

About the Author

Deputy Associate Administrator for International Trade