In export trade transactions, choosing a payment method is, first and foremost, a part of risk management
When a Finnish company is preparing a sales contract with a foreign buyer, one of the first decisions it makes is the payment method to be used in the transaction. Payment methods differ from each other in many ways but, from the exporter’s perspective, the most significant difference is the credit risk they involve. Some payment methods leave the exporter fully exposed to the buyer’s ability and willingness to pay, while others ensure that payment will be received in almost any circumstance.
The starting point in the choice of payment method is often that the exporter would prefer to receive payment before delivery. Buyers, for their part, would prefer to pay after taking delivery.
For an SME that is getting into the export business, it pays to compare different payment methods well before putting in a bid and choose the most suitable option for each case.
“Every export company should consider the impact that realised credit risk would have on its finances. A secure payment method increases costs, but the expenses arising from the payment method are usually only a fraction of the impact that a payment delay or credit loss would have on the company’s result. Furthermore, these costs can be estimated ahead of time,” says Outi Mikola, Finance Manager at Finnvera.
The more significant the transaction, the more secure the payment method
One payment method is unlikely to suit every export trade transaction. When choosing the payment method, the aim is to find a solution that satisfies both the exporter and the buyer. The chosen solution should also eliminate unnecessary risks related to payment and the delivery of the goods.
“Companies should have a risk policy that largely defines which risks they are willing to take in different types of transactions. The more customised and significant the export trade transaction is, the higher the significance of risk mitigation,” Mikola explains.
The most secure payment method is confirmed documentary credit, which protects the exporter also from risks associated with the buyer’s bank and country. When used appropriately, a documentary credit is a 100% guarantee of receiving the payment.
If agreement on a secure payment method cannot be reached with the buyer, the exporter should consider using credit insurance or Finnvera’s export credit guarantee to cover the credit risk.
In export trade, the choice of payment method, risk mitigation and the financing-related needs of the buyer and exporter constitute a comprehensive solution that can both improve a company’s competitiveness and prevent credit losses.
Read more about the differences between payment methods and other export financing solutions here (in Finnish).