As in the domestic market, there are many different ways of receiving payment for goods sold to buyers. The payment method you use may have a significant effect on the financing you require and the level of risk to which you are exposed. We will now discuss the most common payment methods in exporting:

• Payments in advance
  
• Open account
  
• Documentary collections
  
• Documentary credits

Open account

This is an agreement you would really only enter into with a very good client - one that you trust. With an open account, you agree to supply the goods to the importer and, once you have done so, you then invoice the buyer. Once the buyer receives the invoice he or she effects payment.

There may be some credit terms associated with an open account. In other words, you will agree with the buyer that he/she only needs to pay say 30 days after receiving your invoice. With an open account, you, as the exporter, carry all the risk associated with the sale. You may need to arrange financing yourself to pay for the credit period, but banks may be reluctant to finance you solely on the strength of the open account as they have no guarantee that the importer will pay. Instead you may have to offer other forms of guarantee.

Payments in advance

This is certainly the most preferred form of payment from the exporter's point of view. Unfortunately, importers are seldom willing to pay for goods in advance. However, if you are in a very strong negotiating position (for example, you are the only supplier of the goods or the only company that has stock currently), you may be able to negotiate payment in advance for all or part of the shipment.

Alternatively, an understanding importer may be prepared to pay for part of the contract price in advance as evidence of goodwill. This provides you with some security that you will be paid and helps to fund the cost of your production and shipping. At the same time, it allows the buyer the opportunity to check the quality of the goods before parting with the rest of their money. This will need to be negotiated with the importer.

With payment in advance, you have no risks and bear none of the financing costs. There is no additional cost to you beyond the costs involved in any export transaction. Payment or part payment in advance is typically used for low value sales to individuals or new customers. Payment in advance is also common when selling over the Internet. If you wish to buy a book from Amazon.com, you would by credit card and only once you have paid, would the books be dispatched to you. It is a realistic alternative payment method for small exporters that sell rather unique items such as art work, and most overseas buyers will be willing to use this method of payment because the amounts involved are small (and hence, the risk is small).

For any individual transaction, the most appropriate method will depend on the level of risk involved, how strong your negotiating position is and how the cost of financing compares for you and your customer.

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