Payment Methods Used in Export and Import Transactions
Export and import transactions are a critical process for both sellers and buyers in terms of determining payment methods. Payment methods create trust between parties, as well as ensuring cash flow and sustainability of trade. Here is a review of the most commonly used payment methods and their advantages and disadvantages:
1. Cash in Advance
Cash in Advance is the payment made by the importer before receiving the goods. In this method, the logic is "I have the money, you have the goods!"
How Does It Work?
- The importer deposits the cost of the goods into his bank.
- The bank transfers this money to the exporter's bank.
- Once the money is transferred to the exporter's account, the goods are delivered to customs.
Advantages:
- It is the safest method for the exporter; the goods are not sent before payment is received.
- The exporter's cash flow is supported, they can cover their costs immediately and invest in production processes.
- If there is a supply shortage in the market or if the importer has a high need to supply the goods, advance payment is more easily accepted.
Disadvantages:
- Since the importer has to make payment before receiving the goods, they take risks regarding quality, delivery and whether the goods will actually be sent.
- For importers with capital shortages, advance payment can strain their cash flow.
2. Cash on Delivery (Open Account)
Cash on Delivery refers to the importer making payment after receiving the goods. In other words, the approach is "First the goods, then the money!"
How Does It Work?
- The exporter sends the goods.
- The importer makes the payment through the bank after receiving the goods.
Advantages:
- The importer makes the payment after receiving the goods; he can check the quality of the goods and the correct delivery.
- The importer has the opportunity to sell the goods and can make the payment with the income obtained from the sale.
Disadvantages:
- The exporter expects payment after sending the goods and faces serious risks if the importer does not pay.
- Collection problems can extend to international legal processes.
3. Documents Against Payment - D/P
In this method, the importer pays the price of the goods in exchange for documents representing the goods. The documents function like a passport here.
How Does It Work?
- The exporter ships the goods and delivers the relevant documents to the bank.
- The importer makes payment after receiving the documents.
Advantages:
- The importer does not pay before receiving the goods; he can verify that the goods meet the required specifications through the documents.
- It provides a certain level of security for both parties.
Disadvantages:
- If the importer does not accept the goods or does not receive the documents, the exporter may have to take the goods back.
- Document transfer between banks can slow down the process.
4. Letter of Credit - L/C
Letter of credit is a method that commits the importer to make payment to the exporter through his bank.
How does it work?
- The importer opens a letter of credit with his bank.
- The exporter sends the goods after accepting this letter of credit.
- The bank makes the payment when the documents are verified.
Advantages:
- It is the safest method for both the importer and the exporter.
- The importer can pay for the goods using credit from his bank.
- It creates a claim for the exporter.
Disadvantages:
- It may be more expensive than other methods due to interbank commissions and transaction fees.
- It is complicated to fully meet the documents and conditions.
5. Bank Payment Obligation - BPO
BPO is a method in which the bank promises to make payment in exchange for certain documents.
How Does It Work?
- The importer and exporter exchange documents through their banks.
- The bank makes the payment after reviewing the documents.
Advantages:
- The process is carried out quickly through digital platforms.
- The exporter receives a payment guarantee after the goods are shipped.
Disadvantages:
- This process, which is carried out digitally, can be complex for small companies.
- Banks can often charge high commissions and transaction fees.
6. Consignment Payment
Consignment means that the goods are given to the importer, but the goods are sold before payment is made.
How does it work?
- The exporter delivers the goods to the importer.
- The importer makes the payment when selling the goods.
Advantages:
- The importer does not pay before selling the goods.
- Provides flexibility on cash flow.
Disadvantages:
- The exporter must wait for the importer to sell the goods to receive payment.
- The payment period may be longer.
7. Credit Payment
The importer pays for the goods with a loan provided through a bank.
How does it work?
- The importer gets a loan from his bank and pays for the goods.
- The bank collects its receivables from the importer later.
Advantages:
- The importer can buy goods without having to fulfill his obligations immediately.
Disadvantages:
- Bank interest and charges can increase costs.
8. Pre-financing Payment
Prefinancing is when the importer pays a certain amount of money before the goods are shipped.
How does it work?
- The importer pays a predetermined amount of money.
- The exporter produces and ships the goods in return for this payment.
Advantages:
- The exporter provides the necessary financing for production.
Disadvantages:
- The importer has to pay before the goods are delivered.
9. Mixed Payment
In this method, a portion of the goods price is paid in advance and the rest is paid after delivery.
How does it work?
- The importer pays a portion of the goods price in advance.
- The rest is paid after the goods are received.
Advantages:
- Both parties share the risks.
Disadvantages:
- The payment process can be complicated.
10. Netting Payment
Settlement payment is a method whereby the parties balance their receivables and debts to each other.
How does it work?
- The parties balance their debts to each other.
Advantages:
- The payment process becomes faster.
Disadvantages:
- Requires mutual trust.
11. Open Account Payment
Open account is when the importer pays within a certain period of time after receiving the goods.
How does it work?
- The importer receives the goods.
He/she pays within a certain period of time.
Advantages:
- It is the most advantageous payment method for the importer.
Disadvantages:
- It carries a high risk for the exporter.
Conclusion
Choosing the right payment method for export and import transactions is very important for the sustainability of commercial relations. Parties should determine the most suitable method for themselves by considering their trade volume, risk perception and cash flow.
