Getting paid in global trade is the one question that matters more than anything else when you start dipping a toe into selling overseas.
Exporting brings big opportunities but also big risks. From dealing with overseas buyers, unfamiliar banking systems, and multiple currencies, there’s plenty to think about. We’ll break down the main payment methods by risk, how they work, why they matter, and what exporters need to get right to protect their cash flow. Let’s look at getting paid in global trade.
The 4 Main International Payment Methods
1. Advance Payment
Advance payment carries the least risk for exporters of all the payment methods. This is when the buyer pays for the goods before they are shipped. It’s the best payment method for high-risk markets, for new buyers with no payment history, and for customised goods.
The main advantage of advance payment is that your risk of shipping is minimal as you receive payment before you ship any goods. You keep full control of the shipment until the payment clears into your bank account.
However, advance payment can be unpopular with buyers because it requires an element of trust. It can also be challenging to get for large orders and some countries restrict the sending of foreign currency in this way.
2. Letter of Credit
If you can’t get your buyer to make an advance payment, then a letter of credit is the next-best thing. A letter of credit is a bank guarantee that the seller will be paid IF the commercial documents match the terms. It is one of the most secure and widely used methods for higher-value, international trade.
There are two types of letter of credit:
- Unconfirmed – payment is guaranteed by the buyer’s bank only.
- Confirmed – payment is guaranteed by both the buyer’s bank and the seller’s bank (safer, but more expensive).
For the seller, a letter of credit is a great payment option. It shifts the risk onto the bank(s), ensures certainty about the timing of a payment and the documentation required to make it happen. It also enables a business to trade more safely in a riskier market than might otherwise be possible.
However, it can be complex and time-consuming to get payment successfully, requiring patience and attention to detail. Any errors in the documentation can delay or even block a payment, and any amendments needed can cost time and money to sort out.
Take a look at the UCP 600, the International Chamber of Commerce’s rules on documentary credit.
3. Documentary Collections
Documentary Collections are a payment method where the risk starts to increase for the seller. Here, the banks handle the document exchange, but do not guarantee payment. The ownership of the goods stays with the exporter until payment or the acceptance of documents.
There are two types of documentary collection:
- D/P – Documents Against Payment (“Cash Against Documents”) – the buyer only receives their documents after paying in full so it is safer for exporters.
- D/A – Documents Against Acceptance – the documents are released once the importer accepts a Bill of Exchange (a promise to pay later). This option is riskier for the seller because the goods are released before payment is received.
Documentary collections are best used with more established customers, when the buyer’s country is stable and with credit insurance in place in the event of non-payment.
4. Open Account
Open account carries the most risk for sellers because the goods are shipped before payment is made. It is best for long-standing and trusted buyers who have a good payment history and with credit insurance in place.
An open account supports ongoing customer relationships with clear and simple documentation to facilitate it. However, it can be high risk if payment is delayed which can have implications for cash-flow and working capital.
Making a success of getting paid in global trade
Getting paid in international trade is rarely as simple as just issuing a commercial invoice. Exporters should understand the risks involved, navigate multiple payment methods, and choose the right method for each market and buyer. Plan early, review carefully and keep documents consistent to maximise success. Master these and you’ll reduce risk, speed up payments, and trade internationally with far more confidence.
Other resources: How to choose an incoterm for your drinks export
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