INTERNATIONAL CHARGING METHODS

Speed up your business with these expert tips on "Ways to collect international payments". Analyse and discover this TIP!

The most appropriate means of collection to choose will be the one that, at the lowest possible cost, best satisfies your objectives in the commercial transaction. However, the achievement of these objectives will be strongly influenced by a multiplicity of factors!!!

The degree of confidence, need and country risk are some of the most important.

• If the degree of trust between buyer and seller is high, the seller shall have no objection to dispatching the goods prior to receipt of payment, nor, conversely, shall the buyer object to payment prior to receipt of the goods.

The greater the knowledge, the greater the capacity to assess risk. When trust is not sufficient, the parties will tend to require a means of payment that guarantees the exporter the collection and the importer the receipt of the goods. 

• The degree of need (or position of strength between the parties) that the buyer has to buy or the seller has to sell may lead to the imposition of the means of payment by the party with the greater bargaining strength. 
• The country risk stemming from the political or economic situation of the country The importer's risk may lead the seller to require a means of payment to cover possible risks arising from instability in his customer's country.

Likewise, importers from certain countries will be obliged to accept means of payment that represent a guarantee for the seller, otherwise it will be difficult for them to find suppliers.

A golden rule in any business operation, and especially in one that is international in nature, is "know your customer well".

This is equivalent to obtaining as much information as possible. You can cover the country risk by means of a documentary credit confirmed by a bank, in this case, the Bank undertakes to pay or promise to pay on presentation of documents in conformity. 

Unlike export credit insurance (which also covers country risk), the cover of the confirmed documentary credit is for the entire contract and is settled at maturity without any delay.

As exporters this is the order that suits you best

• Simple prepayment (+).
• Documentary credit confirmed (+).
• Letter of credit (+).
• Documentary collection (+).
• Simple deferred payment.

There is FOUR WAYS for international payments that vary in security. The method chosen depends on the level of knowledge of the foreign buyer or seller, the size and frequency of transactions. 

Where the risk is perceived to be low, the parties may choose to seek appropriate low-cost debt settlement mechanisms. The buyer may make a simple payment in advance before receiving the goods for which he is paying; or the seller may deliver the goods and grant a simple deferred payment to the buyer, without the need to guarantee such payment.

In both cases the settlement system will be by cheque or transfer. Sometimes the seller wants to keep control over the goods shipped until payment is made or promised. In such a case, the seller may entrust a bank with the collection of the commercial documents. This would be a documentary collection (or remittance).

If there is no payment or promise of payment, the seller still checks the documentation, but the goods are probably at destination, so the seller will have to reship the goods or find an alternative buyer. Documentary credit This would allow the seller to have security of payment prior to the dispatch of the goods, and even prior to the start of production.

For his part, the buyer would be assured that his payment obligation will only arise when the seller has provided sufficient documentary evidence that the desired goods have been dispatched.

The credit is therefore a guarantee for both parties:

• SIMPLE PAYMENT (+).

• THE CHECK (+).

• TRANSFER (+).

• BILL OF EXCHANGE (OR RECEIPT) (+).

• DIRECT DEBITS (+).

• ADVANCE PAYMENT (+).

• LETTER OF CREDIT (+).

• DOCUMENTARY CREDITS (+).

• DIRECT PAYMENT (+)

• DOCUMENTARY COLLECTION (+)

THE MAIN ONES ARE DETAILED BELOW:

• SIMPLE PREPAYMENT

This is the simplest form of international collection. In this case, the buyer pays the value of the goods in advance before the goods are shipped. This form of payment is suitable when the degree of trust between the parties is high, and the risk of non-payment is low.

It is a safe and cost-effective way to conduct international transactions, as it does not require the intervention of a bank and there are no additional costs for the use of financial instruments.

• SIGNED DOCUMENTARY CREDIT

This is a more secure form of payment than simple payment in advance. In this case, the buyer's bank issues a letter of credit in favour of the seller, committing to pay the value of the goods when certain conditions established in the documentary credit are met.

In addition, the seller's bank (the confirming bank) also undertakes to pay the seller, assuming responsibility for guaranteeing payment, even if the issuing bank fails to meet its obligations. This form of payment is appropriate when the degree of trust between the parties is not very high, and greater security is required for the transaction.

• LETTER OF CREDIT

It is a form of payment similar to a confirmed documentary credit, but in this case, the buyer's bank does not confirm the credit, and the responsibility for payment rests solely with the issuing bank. This form of payment is suitable when the degree of trust between the parties is medium, and additional security is required in the transaction.

• DOCUMENTARY COLLECTION

A form of payment in which the seller sends the goods to the buyer, but the documents necessary for the release of the goods (such as the bill of lading) are handed over by the seller to his bank, and the latter sends them to the buyer's bank for collection once payment has been made.

In this case, the seller's bank does not undertake to guarantee payment, but only acts as an intermediary in the transaction. This form of payment is suitable when the degree of trust between the parties is low, but greater flexibility in the transaction is required.

In a nutshell, the choice of the form of international collection will depend on the degree of trust between the parties, the need and the country risk, as well as the size and frequency of the transactions. It is important that the parties involved should be familiar with their counterparty and market conditions before choosing the most appropriate form of payment for their transaction.

PRACTICAL EXAMPLES OF INTERNATIONAL CHARGING METHODS:

• SIMPLE PREPAYMENT

Suppose a company in the United States sells electronic products to a company in Japan. The Japanese company makes an advance payment by bank transfer before the products are shipped. The US company ensures that it receives payment before the products are shipped, which reduces the risk of non-payment.

• CONFIRMED DOCUMENTARY CREDIT

Suppose a company in Brazil sells machinery to a company in South Africa. The South African company applies for a confirmed documentary credit from its bank, which issues a letter of credit in favour of the Brazilian company.

The seller's bank in Brazil confirms the credit, which guarantees payment of the transaction. Once the Brazilian company ships the machinery, it submits the required documents to the buyer's bank in South Africa for payment.

• LETTER OF CREDIT

Suppose a company in Spain sells fashion products to a company in Mexico. The Mexican company requests a documentary credit from its bank, which issues a letter of credit in favour of the Spanish company.

The issuing bank agrees to pay the value of the goods once certain conditions are met, such as the presentation of shipping documents. The Spanish company sends the goods and presents the required documents to the issuing bank to receive payment.

• DOCUMENTARY COLLECTION

Suppose a company in China sells electronic components to a company in Australia. The Australian company asks its bank to handle the documentary collection. The Chinese company ships the electronic components and submits the necessary documents to the bank in China.

The bank in China sends the documents to the bank in Australia, which delivers the documents to the Australian company after receiving payment. The bank in China does not undertake to guarantee payment, but acts as an intermediary in the transaction.

How can I use the Inteligencia Artificial (IA) to find out which payment methods are of most interest to me?

YOU CAN ASK CHATGPT ABOUT THE PAYMENT METHODS THAT ARE BEST SUITED TO YOUR SPECIFIC SITUATION:

For example, you can provide information on the type of transaction you want to make, the country of origin and destination of the goods, the level of trust between the parties, the country risk and other relevant considerations. Based on this information, ChatGPT can provide you with advice on the international payment methods that best suit your needs. 

It can also help you understand the pros and cons of each method and help you make an informed decision about which payment method is best for you.

 Remember that while ChatGPT can provide useful information, it is always important to consult an international finance expert for professional advice specific to your situation.

PRACTICAL EXAMPLES OF HOW YOU CAN USE CHATGPT TO GET ADVICE ON THE INTERNATIONAL CHARGING METHODS THAT WORK BEST FOR YOU:

1. If you are an exporter selling goods to a buyer in a country with a high risk of non-payment, you can ask ChatGPT about the safest ways to avoid the risk of non-payment. ChatGPT can recommend the use of confirmed documentary credits or documentary collections, which provide greater security for the seller.
2. If you are an importer who wants to buy goods from a seller in another country, you can ask the ChatGPT about the most appropriate payment methods for your financial situation. If you do not have sufficient capital to make an advance payment, ChatGPT can recommend the use of documentary credits, which allow you to defer payment until certain conditions are met.
3. If you are an exporter who has a trusted relationship with a buyer in another country, you can ask ChatGPT about the most cost-effective ways to make international transactions. ChatGPT can recommend the use of simple payments, such as bank transfers or cheques, which cost less than other payment methods.

Remember that the ChatGPT can provide you with useful information on international charging methods, but it is always important that you consult an international finance expert for professional advice specific to your situation.