Several approaches, some riskier than others for exporters
SBA official Dennis Chrisbaum identifies four common ways to get paid for an international order. From the most to the least secure method of payment for the exporter, these are:
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's high risk. The money is gone with only the exporter's promise to deliver.
- Drawback: It limits the exporter's sales potential, it's noncompetitive, and it ties up the importer's cash.
Letters of credit 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 letter of credit are met.
- Buyer's perspective: The funds won't be released until shipment is made and terms are met.
- Drawback: There are fees associated with opening and amending a letter of credit, and the importer's cash is tied-up.
3. Documentary collections
This method uses the banking system to send documents to the importer.
- Advantage: The goods are not released until importer pays or agrees to pay.
- Buyer's perspective: Payment is delayed until goods are close to being delivered.
- Drawback: No guaranty of payment; banks only act as intermediaries.
4. 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, and it doesn't tie up the importer's cash.
- Drawback: 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 can be minimal: about 65 cents per $100 of the invoiced amount for a policy that provides 95% coverage.