There are a number of payment methods available to businesses that need to pay money to freelancers and other businesses from different countries around the world. Generally, businesses decide on the platform to use based on the reliability of the platform, its cost and the risk it is ready to take using that payment method.Three tips on how to effectively make business payments internationally while traveling.Check out my top tips about making business payments.
The majority of businesses prefer international wire transfers because of its cost, reliability and low risk. Trading internationally is very similar to the way businesses trade domestically. The main difference is in that because the businesses are in overseas markets, the process is often complex and sometimes vague. For this reason, international payments methods will typically cost more because their risk level is considered considerably higher. They will often include open account payments, documentary credit or letters of credit, advance payments, and documentary collection.
Open Account Payments
An open account payment works the same way that a bank or another financial institution offers credit to its domestic customers. By and large, the term of credit will begin when the goods the customer is buying are dispatched and an invoice is sent in accordance to the trading terms that all parties have agreed on.
Up to 80% of all global trade (PDF) happens based on open account payments. This is in part because it is the least expensive and the simplest. All the same, for this method to work, the recipient must trust the trading partner whose responsibility it is to pay. Therefore, most businesses will agree to small transactions first to test how well the relationship works, hoping to grow the transactions as the trust between the two parties grows.
Documentary Credit/ Letters Of Credit
Documentary credits are the most secure payment method other than receiving advance payments. The importing entity arranges with the issuing bank a letter of credit (LC) to pay the correspondent bank once it receives all the required documentation. While LCs are secure, they are not a guarantee that a payment will be made. A transaction becomes a guaranteed payment when all the necessary documents are received before the date LC’s expiry date.
Documentary collections are common with exporters who sell to importers with which they already have a trust-based working relationship. In these business payments, the parties involved draw up a bill of exchange, which allows the exporters to continue controlling the goods and even raise more funding. The transactional documents are released to the importer once he accepts the terms of the bill of exchange rather than after he has paid for the goods that he has ordered. This means, therefore, that the exporter still risks the possibility of not being paid once it’s time for the importer to live up to the terms of the bill of exchange.
When doing international business payments, businesses will often attempt to strike a balance between their own risk and the risk of the other parties involved in the transaction. For new businesses trying to participate in international trading, taking time to learn how each method works and the risks involved is of paramount importance.