General

Do you know the most common payment methods for foreign trade? With the development of the Internet and the convenience of transportation methods such as railways and airplanes, exchanges between countries are becoming increasingly frequent, especially in foreign trade. Everyone goes abroad to do business, and establishing international trade mechanisms involves multiple disciplines such as finance, logistics, taxation, and supply chain. Any import or export includes commercial transactions and payments. Generally, international transactions are conducted in US dollars. However, in many transactions with Europe, the euro is also used as a currency. When doing foreign trade, it is important to address the issue of payment methods for foreign trade, as there are differences between different currencies, tax rates, foreign exchange controls, and countries. If you want to start foreign trade, you must first clarify the payment methods for foreign trade. In export trade, we have several types of trade or export transactions, and the nature of the transaction determines the terms of payment.

Prepayments

When a new customer approaches an order with a local exporter, it is usually possible to insist on prepayment to execute the order. This method usually lasts several times until both parties establish mutual trust and gradually understand each other.

letter of credit

Letter of credit is a relatively safe foreign trade payment option. If an exporter deals with an unknown customer at the other end, there may be no risk to the customer's credit status in advance, and they usually insist on requiring the customer to open a confirmed letter of credit before shipping the goods. In this case, the exporter shall not provide any letter of credit. In addition, in the case of high value transactions with known customers, exporters are more willing to pay through letters of credit. When dealing with customers, exporters can inquire about their credit ratings from their banks to determine their authenticity and credibility. Under normal circumstances, large multinational companies require such credit reports as part of their policies.

Documentary bill

When there is sufficient relationship between the exporter and the customer (importer), and the customer's credit reliability is known from previous records, the exporter may decide to provide credit in the form of a draft and accept payment. This system is also known as a documentary bill of exchange. There are two types of documentary bills: sight bills and date and time bills.

Opening or continuing an account

If there are significant ongoing commercial transactions between the exporter and the importer, and the export is still ongoing, the exporter can export according to the purchase order and expect the importer to make timely payments on the due date. This is the usual method of payment for foreign trade used by most multinational companies and large organizations, which have sufficient import volumes distributed in various countries and are continuing to cooperate with multiple suppliers. In this case, they simply determine the annual supply volume of each supplier, issue an open purchase order, and review only the delivery schedule. As a global policy, they provide standard payment commitments to all suppliers on specific dates. The payment process will be set and determined as part of their business agreement.

Other types of foreign trade payment methods

In addition to the above foreign trade payment methods based on normal import and export, there are other types of business models, which are also applicable to various other foreign trade payments.

Commissioned sales

Exporters can sign contracts with overseas distributors to import, hold inventory, and sell goods on their behalf. In this case, the distributor may not own the inventory and ownership may continue to belong to the exporter. "A distributor is just a middleman who sells inventory, returns the realized money to the exporter, and receives a service fee or commission in return.". In this case, there may be commercial agreements, but fixed payment mechanisms cannot be used.

Counter trade/counter trading/barter trade

In another commercial arrangement known as counter trade, exports may be related to the purchase of certain other items from importers or other sources in the country. Payments may also involve services other than products. This trade becomes necessary when dealing with countries that do not have sufficient foreign exchange. There is another international barter system that is not common in the commercial world.