Export payment methods
Choosing a payment method is, first and foremost, part of risk management. With good advance planning, you can significantly improve your competitiveness in export trade and avoid credit losses.
Choosing a payment method is, first and foremost, part of risk management
It is a good idea to compare different payment methods well before making your offer and choose the most suitable option for each case.
Comparing payment methods
The more secure the payment method, the higher the costs involved. Nevertheless, the costs resulting from the payment method are often only a fraction of the impact that a delayed payment or, in the worst case, credit loss would have on your company’s result.
The bank’s role
Payment methods are divided into direct payments, or payment orders and cheques, and documentary payments, or foreign collection items and documentary credit.
In direct payments, the bank acts only as the transmitter of payments. In documentary payments, the banks transmit not only payments but also delivery-related documents and supervise the fulfilment of agreed terms and conditions.
Factors influencing the choice of payment method:
- the company’s risk policy
- counterparty risks (enterprise, country and bank risks)
- competition and market conditions as well as trade practices
- the size and object of the transaction
- the need to offer financing and/or grant time for payment
- speed and costs.
Payment order
Payment order
(T/T)
The payment order is the equivalent of the domestic bank transfer. It is based on the trust between the buyer and the exporter and it does not protect the exporter from risks related to receiving the payment. The payment order is fast and has lower costs than other payment methods. Depending on the target country, the payment will be on the recipient’s account in 1–3 banking days from being charged from the payer’s account.
The payment order is the equivalent of the domestic bank transfer. It is based on the trust between the buyer and the exporter and it does not protect the exporter from risks related to receiving the payment. The payment order is fast and has lower costs than other payment methods. Depending on the target country, the payment will be on the recipient’s account in 1–3 banking days from being charged from the payer’s account.
Exporter
Buyer
The exporter's bank
The buyer's bank
Contract Payment assignment Payment Payment Payment
ContractA contract is signed between the exporter and the buyer. The exporter sends an invoice to the buyer.
Payment assignmentThe buyer receives the invoice and submits a payment assignment to their bank.
PaymentThe bank receives the buyer’s assignment and makes the corresponding payment to the exporter’s bank.
PaymentThe exporter’s bank receives the payment and transfers it to the exporter.
PaymentThe exporter receives the payment.
Cheque
Cheque
(NOT RECOMMENDED)
It is not recommended to use cheques in foreign trade as they are a slow payment method and easy to forge. In addition, it is more expensive to use cheques than payment orders.
Foreign collection item
Foreign collection item
(Documentary collection, Cash against documents CAD)
In connection with foreign collection items, the bank sends commercial documents to the buyer’s bank, which monitors that the payment is made. However, the buyer’s bank does not commit to paying the transaction amount in case the buyer does not make the payment or accept the bill of exchange. Consequently, the exporter carries the risk associated with the buyer’s ability and willingness to pay. The buyer gets the documents into their possession only against payment (documents against payment, D/P) or, if the exporter grants a payment period, after accepting the bill of exchange (documents against acceptance, D/A).
In connection with foreign collection items, the bank sends commercial documents to the buyer’s bank, which monitors that the payment is made. However, the buyer’s bank does not commit to paying the transaction amount in case the buyer does not make the payment or accept the bill of exchange. Consequently, the exporter carries the risk associated with the buyer’s ability and willingness to pay. The buyer gets the documents into their possession only against payment (documents against payment, D/P) or, if the exporter grants a payment period, after accepting the bill of exchange (documents against acceptance, D/A).
Exporter
Buyer
The exporter's bank
The buyer's bank
Contract Goods Assignment and documents Collection item notification Payment or bill of exchange Payment and documents Documents Payment Payment
ContractA contract is signed between the exporter and the buyer. The exporter hands over the goods to the freight carrier, submits an assignment to their bank and appends the commercial documents to it.
GoodsThe buyer receives the goods. In sea transport, the goods are often handed over against a bill of lading.
Assignment and documentsThe exporter’s bank receives the assignment, which defines the terms and conditions under which the documents are handed over to the buyer at the buyer’s bank. On the basis of the assignment, the bank submits a collection item assignment to the buyer’s bank and includes payment instructions in it. The exporter’s bank enquires about the payment, if necessary.
Collection item notificationThe buyer’s bank informs the buyer of the collection item and enquires about the payment, if necessary.
Payment or bill of exchangeThe buyer makes the payment to their bank or accepts the bill of exchange that grants the buyer with time for payment.
Payment and documentsThe buyer’s bank makes an immediate payment to the exporter’s bank or sends a notification about the acceptance of the bill of exchange. The buyer makes the payment on the due date.
DocumentsThe buyer has fulfilled the terms and conditions related to handing over the documents and gets the documents into their possession.
PaymentThe exporter’s bank receives the payment and transfers it to the exporter.
PaymentThe exporter receives the payment from their bank.
Documentary credit
Documentary credit
(Documentary credit, D/C, Letter of credit, L/C)
A documentary credit is the buyer’s bank’s irreversible commitment to pay to the exporter, provided that the exporter fulfils the documentary credit terms and conditions that are based on the sales contract. Using a confirmed documentary credit protects the exporter also from risks associated with the buyer’s bank and country. In the confirmation, the exporter’s bank commits to paying the sum of the documentary credit when the exporter fulfils the documentary credit terms and conditions. When used appropriately, a documentary credit is a 100% guarantee of receiving the payment
A documentary credit is the buyer’s bank’s irreversible commitment to pay to the exporter, provided that the exporter fulfils the documentary credit terms and conditions that are based on the sales contract. Using a confirmed documentary credit protects the exporter also from risks associated with the buyer’s bank and country. In the confirmation, the exporter’s bank commits to paying the sum of the documentary credit when the exporter fulfils the documentary credit terms and conditions. When used appropriately, a documentary credit is a 100% guarantee of receiving the payment
Exporter
Buyer
The exporter's bank
The buyer's bank
Issuing the documentary credit Contract Opening the documentary credit Not output anywhere Notification and confirmation Manufacturing the goods Shipping and documents Paying the documentary credit Goods Payment and documents Payment Payment and documents Payment Payment Payment
Issuing the documentary credit
ContractA contract is signed between the exporter and the buyer. The buyer submits an assignment to their bank to issue a documentary credit for the exporter.
Opening the documentary creditThe buyer’s bank (the issuing bank) opens the documentary credit in the exporter’s bank. The documentary credit defines the documents that the exporter must present in order to get the right to receive the payment from the buyer’s bank.
!The confirmation protects the exporter from the foreign country and bank risk. The exporter must ensure their ability to fulfil the documentary credit terms and conditions.
Notification and confirmationThe exporter’s bank notifies the exporter of the documentary credit. When the bank confirms the documentary credit, it also commits to making the payment to the exporter when the exporter presents the documents defined in the documentary credit terms and conditions.
Manufacturing the goodsThe exporter can start to manufacture the goods.
Shipping and documentsThe exporter delivers the goods according to the documentary credit terms and conditions and presents the documents to their bank.
Paying the documentary credit
GoodsThe goods are delivered to the destination according to the documentary credit terms and conditions.
Payment and documentsThe exporter’s bank verifies that the documentary credit terms and conditions are fulfilled, makes the payment to the exporter according to the documentary credit terms and conditions and delivers the documents to the buyer’s bank.
PaymentThe exporter receives the payment from their bank.
Payment and documentsThe buyer’s bank checks the documents and delivers them to the buyer and makes the payment to the exporter’s bank according to the documentary credit terms and conditions.
PaymentThe exporter’s bank receives the payment from the buyer’s bank.
PaymentThe buyer receives the documents and makes the payment to their bank.
PaymentThe buyer’s bank receives the payment.
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