Payment Methods: Which are the most used in the international market?

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Payment is the moment of great importance in all business and in foreign trade there are some payment modalities available for those who import or export. Each one has advantages and disadvantages and needs to be evaluated from different aspects.

Within international trade, several precautions are necessary due to distance, currency variations, differences between markets and laws. In addition, the choice of the ideal modality will depend on the value of the transaction, exchange rules, operating cost, agility with the documentation and the trust between the parties involved in the negotiation.

It is important to emphasize the influence of the exchange rate on the transaction, that is, depending on the currency in which payments will be made, the profitability of the operation may vary.

The most common types of international payments are remittance without withdrawal, letter of credit, advance payment and documentary collection.

Shipment without withdrawal

In this type, the importer receives the exporter's documentation, promotes customs clearance and, finally, arranges the payment. This modality has advantages in terms of agility and reduction of bank expenses.

However, there is a risk of documentation being lost and the exporter runs the risk of not receiving payment. Thus, it is a modality that should be chosen depending on the degree of trust between those involved.

Letter of Credit

The letter of credit is one of the safest modalities in international trade, as it offers guarantees for both parties.

The importer requests the credit in a bank, the existence of this credit is notified to the exporting bank that arranges the shipment of the goods in accordance with the conditions issued in the letter of credit. Finally, the exporter sends the documentation and when these documents are checked, the credit is released for payment.

Thus, the letter of credit is a payment commitment, so it is recommended in transactions in which the degree of trust between the parties is still low or has not been established.

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Advance Payment

In this payment type, the importer makes the payment before the exporter sends the product. Thus, the remittance of foreign exchange occurs and after the confirmation of this credit, the exporter carries out the shipment of the goods and sends the documentation.

This modality is advantageous for the exporter as the importer assumes the risks, since there is no guarantee of receipt of the goods before payment. Therefore, the signing of a contract between importer and exporter is recommended.

Documentary Collection

In this case, all purchase and sale documentation is done via the bank. The exporter must ship the goods and send the documentation, while the importer makes the payment to get the documentation at the bank and release the goods at customs.

This process is more secure in relation to the sending of documents and gives the exporter the guarantee that the goods will only be delivered after payment. The downside is the costs in terms of fees and defaults.

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