International trade transactions tend to be characterised by a higher level of risk and complexity. While, the risks resulting from the transport of the goods could be managed by relying on the Incoterms rules, the risks associated with the payment requires a specific approach.
Indeed, the risk of non-payment is probably one of the most sensitive aspects of cross-border trading, and as such, it requires a central attention.
Whereas for domestic trade the buyer and the seller have to comply with their respective national laws, things are quite different for cross-border transactions since there is no supranational jurisdiction.
From this perspective, adopting an open account method, where the buyer can pay between 30 to 90 days after the reception of the goods, might be risky especially with new buyers with whom no relationships has been built. Needless to say that in case of non-payment issues, the procedure is likely to be costly and time consuming.
Conversely adopting an upfront payment or cash in advance method, could be a risk-free option for the Seller. However, this could impact adversely the Exporters’ competitiveness since it increases cash-flow needs for Importers who will be more likely to look for other suppliers with better conditions. Furthermore, importers are usually reluctant to make upfront payments in foreign countries, by fear of not receiving the ordered goods.
Fortunately, overtime many tools have been developed to address those shortcomings, which enabled the international trade to experience an unprecedented growth.
It is of paramount importance to have a broad perspective of the international trade payment methods available in order choose the best option.
Indeed, there is no one size fit all way of organising payment in international trade, which is why most of the methods developed below have their own advantages, drawbacks and limits.