As your sourcing efforts expand internationally, you will discover that the typical credit card transaction or invoice/payment within 30 days arrangement is less common.
In fact, if you are not only buying internationally but also selling internationally, you should plan to be much more cautious in extending credit than you may be when dealing within your own country. For the record, that caution is not a demonstration of being anti-global or a show of prejudice against business people from other countries; we advise caution because it is so much more difficult to negotiate, arbitrate or pursue legal action across international borders. It is much smarter to avoid a payment problem than be faced with solving a payment problem.
In today’s interconnected global economy, international payment practices play a crucial role in facilitating cross-border transactions. With businesses and individuals conducting transactions across different countries, it is important to understand the various payment methods, processes, and challenges involved in international payments. This article provides an overview of international payment practices, highlighting key aspects such as currency exchange, payment methods, and risk management.
Currency Exchange: One of the fundamental considerations in international payments is currency exchange. When conducting transactions between different countries, it is necessary to convert one currency into another. Currency exchange rates fluctuate constantly, and the exchange process can impact the overall cost and timing of international payments. Businesses and individuals need to be aware of exchange rates, transaction fees, and choose appropriate strategies to minimize costs and optimize their foreign exchange operations.
Payment Methods: Several payment methods are commonly used in international transactions. These include:
- Bank Wire Transfers: Bank wire transfers involve electronically transferring funds from one bank account to another. They are widely used for large-value transactions and provide a secure and reliable payment method.
- Letters of Credit: Letters of credit are financial instruments commonly used in international trade. They involve a commitment from a bank to pay a specified amount to the seller upon the presentation of specified documents, ensuring a secure payment process for both buyers and sellers.
- Online Payment Platforms: With the growth of e-commerce, online payment platforms such as PayPal, Stripe, and Skrill have gained popularity for international transactions. These platforms provide convenient and efficient payment solutions, allowing businesses and individuals to send and receive payments globally.
- Cryptocurrencies: In recent years, cryptocurrencies like Bitcoin and Ethereum have emerged as alternative payment methods for international transactions. These digital currencies offer decentralized and secure payment options, although their acceptance and adoption are still evolving.
Risk Management: International payments involve certain risks that need to be managed effectively. These risks include:
- Exchange Rate Risk: Fluctuations in exchange rates can impact the value of international payments. Businesses can manage this risk through various hedging techniques, such as forward contracts or currency options, to lock in exchange rates at a future date.
- Counterparty Risk: The risk of non-payment or default by the other party in an international transaction is a concern. Conducting due diligence on business partners, using secure payment methods, and obtaining appropriate guarantees or insurance can help mitigate this risk.
- Regulatory and Compliance Risk: International payments are subject to various regulatory requirements and compliance obligations, such as anti-money laundering (AML) and know your customer (KYC) regulations. Adhering to these regulations is crucial to avoid legal and reputational risks.
International payment practices are essential for conducting cross-border transactions and expanding global business operations. Understanding currency exchange, choosing appropriate payment methods, and effectively managing risks are key considerations in ensuring smooth and secure international payments. As the global economy continues to evolve, staying informed about international payment practices and leveraging technological advancements can help businesses and individuals navigate the complexities of international transactions successfully.
There are several widely used methods for international payment. Below we have provided a chart that summarises the major payment methods along with risks and benefits.
| Method | Usual Time of Payment | Goods Available to Buyer | Risk to Exporter | Risk to Importer |
| Cash in Advance | Before shipment | After payment | None | Completely relies on exporter to ship goods as ordered. |
| Letter of Credit / Confirmed / Sight | When shipment is made | After payment | Credit Risk with Confirming Bank and Documentary Risk. | Completely relies on exporter to ship goods as ordered. |
| Letter of Credit / Confirmed / Time | On maturity of draft | Before payment | Credit Risk with Confirming Bank and Documentary Risk. | Completely relies on exporter to ship goods as ordered. |
| Letter of Credit / Unconfirmed / Sight | When shipment is made | Before payment | Credit risk with Issuing Bank and Documentary Risk. | Is assured shipment made but relies on exporter to ship goods described in documents. |
| Letter of Credit / Unconfirmed / Time of draft | On maturity | Before payment | Credit risk with Issuing Bank and Documentary Risk. | Is assured shipment made but relies on exporter to ship goods described in documents. |
| Sight draft, documents against payment | On presentation of draft to buyer – often a verbal notification receipt by the collecting to the buyer | After payment | Disposition of goods if shipment not accepted. Involves many side risks such as exchange availability. | Is assured shipment made but relies on exporter to ship goods described in documents unless he can inspect goods before payment. |
| Time draft, documents against acceptance | On maturity of draft | Before payment | Disposition of goods if shipment not accepted. Relies on buyer to pay draft at maturity. | Is assured shipment made but relies on exporter to ship goods described in documents unless he can inspect goods before payment. |
| Open account | As agreed | Before payment | Relies completely on buyer to pay his account as agreed upon. | None |
In future articles we will discuss each of these payment mechanisms in more detail so that you can select the transaction method that best meets your needs. We will also include use of the escrow account, an important option for eBay sellers.
Please note that if you are placing an initial sample order, you should confine that order to the smallest amount required to evaluate the supplier and you should expect to pay in advance since you and the supplier do not yet have a relationship and small quantities are not worth the paperwork involved in one of the more cautionary approaches.