Types Of Popular Methods Of Payment For International Transaction Business Can Use

International payment is a critical step in the overseas commerce process, as it allows associated parties to finalize buy sale contracts and service contracts. A foreign commerce partnership cannot be established unless both parties agree to process international payments. Therefore, it is crucial that the parties use suitable methods of payment in international trade in order to finalize this buy and sell.

In this article, our DNBC Financial Group experts will ease business’s stress by providing some popular methods of payment and related risks to avoid. Let’s start investigating!

Types Of Popular Methods Of Payment For International Transaction Business Can Use

What are the four methods of payment for international transactions?

Knowing the benefits and drawbacks of each foreign payment option can help you minimize potential problems while making overseas payments. These days, many different methods of payment are accepted in international commerce and are used often.

Remittance

Remittance is one of the most popular payment methods known by many people. In it, a bank customer will request to transfer a certain amount of money to the beneficiary at some point in time. Normally, to conduct payment activities, the seller, and the buyer will be able to choose one of two methods: prepayment or pay later. 

This means that:

• Prepayment is a method where the buyer (importer) will have to transfer the money in advance to the seller (exporter). After transferring the money, the seller will proceed to transfer the goods to the buyer.
• Later pay is a method in which the buyer (importer) only pays for goods after receiving a sufficient number of goods from the seller (exporter). When the goods are shipped by the seller, the buyer must check that the goods are correct before they proceed to pay for the goods.

If you choose to pay in advance, the buyer bears the risk. However, paying later can prevent the reseller from bearing the risk. Therefore, when you intend to use this payment method, you should consider carefully in order to have a clear agreement before implementation.

Collection of payment

Referring to one of the most popular international payment methods today, it is certainly impossible not to mention the collection method. This method was born to overcome the limitations of post-payment and protect the interests of exporters. Therefore, the collecting party will collect the bill of exchange together with the documents when shipping the goods to the importing party at the request of the exporter.

Specifically, the exporter, after completing the delivery of goods to the importer, will entrust his bank to collect the amount of the importer on the basis of his draft. Therefore, the exporter will limit the late payment from the importer.

In order for the collection method to work, it is necessary to ensure that there are all components: the exporter (trustee), the exporter's bank (the collection bank), the correspondent bank. of the exporter's bank (the importer's national bank) and the importer.

Open account

One of the most popular international payment methods today is the open account method. Accordingly, the exporter will open an open account with the importer. This account will specify the time period that the importer must make payment to the exporter in the future.

Usually, this method is only chosen when both parties have mutual trust, have done trading activities many times and the buyer has a high reputation with the seller. Because, if there is no trust, the bookkeeping method causes quite a lot of risk for the seller.

Cheques

Cheques are payment documents widely used in international transactions. For each cheque, the account holder's order will be recorded, the representative is printed on the form available as prescribed. Accordingly, the account holder will deduct part of his deposit to repay the debt. The person receiving the money will be the person holding the check, the person named on the cheque or the person who is paid to his order.

• The issuer of the cheque can be the holder of a deposit account at a bank, the buyer, the seller, or the person who owes the money to issue the cheque to repay the loan.
• The paying bank is the person who will directly withdraw the cheque from the account holder's account to issue to the beneficiary.
• The beneficiary is the person named on the cheque. With this check can be transferred to another person by endorsement (similar to a bill of exchange).

Encountered risks when making international payments

All parties involved in an international payment transaction want to reach a mutually beneficial payment terms agreement. Thus, both the exporter and the importer may be exposed to hazards depending on the foreign payment method they use. The potential dangers of undertaking overseas transactions, including:

• Late payment: If the seller agrees to let the buyer pay after receiving the commodities, sometimes there will be a delay in payment. Because, the buyer only accepts payment when they receive the commodities in full. Therefore, until the commodities are sold out, they proceed to pay.
• Commodities are not delivered on time: If the buyer agrees to transfer money to the seller before receiving the commodities in the form of payment in advance, deposit, advance,... on time. Even, delivery may not be of the right quality, quantity,… , which directly affects business activities.
• Loss of money: If the seller and the buyer agree to choose a book-keeping payment method, the risk that the seller has to bear will be more than the buyer. In case the payment is due, the buyer (the party being debited) does not pay or makes the payment late, the seller (the party that writes the debit book) has to bear the risk. In some cases, the buyer may lose money because the buyer does not pay. However, the risk of losing money is very small.

About DNBC Financial Group

DNBC Financial Group is one of the top payment institutions. The company provides financial services including personal account, business account and cashless international transfer. All of them are committed to be at low cost, fast remittance, secure, simple and convenient. The company’s clients are all over the world, ranging from Singapore, Hong Kong to Canada.