Payment methods to be made and accepted during the export process have always put the exporter (especially those at the beginning stage) in trouble. When you say which payment method actually means what and what should be considered, one feels as if she/he has to be a foreign trade finance expert.
As in many other issues, the payment methods to be used in exports do not work in practice as in the books.
What I’m going to tell you about will be some more simplified forms that are used during trade.
As the name suggests, before delivering the goods, the importer pays the money via bank ın advance, you see the money in your account and you send the customer’s goods as the exporter. It is the best payment method for the exporter and the most risky for the importer.
However, I recommend insisting that your customers pay upfront during export. From my experience so far, almost all customers (especially for small sales) are actually ready to pay upfront. If they really need that product, if they can’t find many alternative companies, or if your price is better, they will agree to pay you cash. They just need to trust your company.
Always ask 100% advance payment for the offers you will make from the beginning. Or, if you have a product that needs to be put into production, or if the customer has documents that need to be completed, you can request a payment as “50% order and 50% pre-shipment” (these rates may change to the total amount and the cash you need for production) to reserve the goods.
The reason why I suggest you insist is this;
If the amount of goods you will export and your profit margin are low, there is always the risk that you will not be able to receive the money in the payment methods you accept, other than cash payment. Even if you do not lose the goods, the importer can send the goods back to you, she can make up all kinds of excuses because her current economic situation has deteriorated, that is, she/he can do anything not to do or delay the payment. In this case, you will be left alone with double the shipping costs you will pay and the customs costs you will make to bring the goods back to your warehouse. When you say you will make a profit of three cents, you will lose five cents.
If the amount of the goods you will export and your profit are high and the customer wants to see the quality first, instead of accepting the payments against letters of credit or cash against documents;
1. Work with internationally accredited inspection firms such as SGS. If it’s too demanding, cover the inspection expenses yourself. If SGS guarantees your product and confirms its quality, it’s sort of like legal approval. Because the reports of these accredited surveryor organizations are taken very seriously.
2. Invite the customer or any employee of the customer to your factory / warehouse before shipment. Cover the flight ticket, hotel cost for 2-3 days and ask her/him to check the goods before loading. Let them come, check the goods and instruct their company for payment. After you see the money in your account, you can export the goods.
Both of these solutions are being used a lot. It not only saves you the risk of payment, but you also show your customer how much you trust your goods by offering them an accommodation / asking to visit you.
Payment by Letter of Credit
The form of payment, which is briefly stated as L/C (or LoC), is the safest form on paper for both parties. I say on paper, because it can contain different risks according to its types.
In summary, payment by letter of credit works as follows:
- The importer sends the draft of the letter of credit to the exporting company. If it is agreed in the conditions (such as deadline, matters to be specified in the documents, etc.), the exporter approves and asks the importer to open the letter of credit.
- The importer instructs their bank to open a letter of credit.
- If there is no agreement between the exporter’s bank and the importer’s bank, you will receive news that a letter of credit has been opened to your bank, either through the intermediary bank (correspondent bank – in many cases, it is also included in normal money transfers) or directly.
- The exporter prepares the goods to be sent, exports it and sends the necessary documents to its own bank.
- When the goods reach the importer’s customs, the documents are checked by the importer’s bank and if there is no problem, you will receive your payment from your own bank.
- What is safe here is that you will only get the money if you provide the goods on the agreed terms, and the importer will only pay the money if the goods are intact. The importer cannot arbitrarily say that they do not want to buy the goods or pay for the goods, because the exporter’s receivable is guaranteed by the banks.
This is valid for the Irrevocable Letter of Credit. However, this letter of credit has such forms that it is almost no different from Cash Against Goods or Cash Against Documents.
Since you will have to fill out very detailed documents and most of the banks are not very knowledgeable about the procedure, you are likely to have a reserve even for a very small thing (for example, due to weather conditions, your goods will arrive 2 days later than the time specified in the documents). For this reason, letter of credit is a form of payment that we do not recommend accepting unless absolutely necessary.
Yes, many sources state it as the safest method for both parties in the document, but we disagree. Maybe this is true for companies that have an export department and become professional in export, but it is not so valid for companies that have just started foreign trade.
You can sell in the form of the Irrevocable Confirmed Letter of Credit, which is the safest letter of credit. If the customer absolutely insists on this and you trust your goods and deadlines, of course, do not miss the customer. If the importer thinks that you are persistently avoiding the letter of credit method, their trust in you may be shaken. But still, make the offers as I explained in the Advance payment section first.
In the letter of credit payment method, there is no such thing as losing money without getting your goods in return (unless you work with African countries such as Nigeria, Niger), but it can bother you a lot, in the worst case your goods will return.
Cash Against Documents
In payment against documents, the exporter submits the invoice and the shipping documents to be sent to the importer’s bank through their own bank. The collection bank delivers the documents to the importer after making the payment to the remittance bank.
Here, the risky issue for the exporter is the possibility of the importer not accepting the goods (for a certain reason or completely arbitrarily) and not making the payment. Or, some malicious importers may demand discounts of up to 50% on the goods you send, by finding various excuses.
Imagine that you are shipping a container of goods to the USA. Let’s assume that you cover export costs, shipping costs plus you wait 30-40 days for the goods to be delivered. While waiting for the payment, the customer gave up buying the goods at that moment and turned the goods down. Or they looked at the goods and found a ridiculous excuse. With an excuse, they said they would only get the goods if you made a discount.
If you take into account the cost of returning the goods, which you will have to bear again, the cost of customs (if you cannot forward it to another customer) and the additional 30-40 days you will have to wait, you will have to give the customer a discount. In other words, the importer has cornered you.
To avoid such a thing, definitely request a deposit upfront for Cash Against Document payments. Calculate the possible loss incase the buyer does not accept the goods and demand 30-50% of the cost of the goods in advance.
Another issue regarding Cash Against Documents is that in current trade transactions, this business is not always done by using a bank in between. In fact, many times the bank is not involved at all.
In general, the way of using Cash Against Documents is as follows; As an exporter, you take your down payment, load the goods and do not send the other party the necessary documents such as bill of lading and so on. You send a copy of the documents to the importer by e-mail as proof that you have loaded the goods. When the customer receives the goods (or before the goods arrive, depending on your agreement), they pay you the remaining balance, and you send the documents to them.
Cash Against Goods
Unfortunately, it is a form of payment that many sellers accept in order not to miss the customer, but which is very risky for the exporter. While you are reluctant to send open account goods even in domestic trade, sending goods against goods to a company located abroad, which is subject to laws independent of the laws of our country, is almost the same as throwing your goods in the trash.
A payment / sales method that we definitely do not recommend unless you have a long-standing business relationship with your customer. The customer may not pay for your goods or may delay a lot, and you may be in a very difficult situation due to the problems you will experience in your cash flow at that time.
We hope that the questions in your mind about the payment methods used in foreign trade are gone, to a certain extent. Please write your comments for your own problems and experiences during the payment process.