Exporting has many potential benefits: risk spreading, growth opportunities and greater visibility. This means that signing your first international contract is an event to be celebrated. However, your success in other countries will depend to a large extent on the contract’s terms and conditions with respect to termination, logistics agreements, the applicable law and payment methods. The latter point, in particular, is of crucial importance: you obviously want your customers to pay you correctly and on time.
5 most common payment methods
We have categorised the 5 most common payment methods used in international agreements by their security level. Why? A customer or partner you've only known for a short while doesn’t enjoy the same level of trust as a long-term business relationship. In this case, it’s better to opt for one of the more secure options.
How can you ensure secure payments for your company when your products travel long distances and your customers are far away from you? The answer is simple: request payment first and ship later. However, this approach is not risk-free. The buyer has absolutely no guarantee that they will receive the products on time and in full. If one of your competitors offers better terms and conditions, it’s likely that you will miss the sale. Nevertheless, deposits are used more often than you might think at first. Many customers see nothing wrong with paying a deposit, particularly in distant countries that have a less developed and reliable banking system. On the other hand, in the EU, deposits are more of an exception to the rule.
2. Documentary credit
This type of payment, known in many countries as a Letter of Credit or L/C is based on the principle of the importer or buyer’s bank agreeing to pay the exporter or seller’s bank on condition that all of the export documents, including invoices, certificates of origin and transport documents are in order. This ensures that you will be paid, and the customer doesn’t have to proceed with payment until the products have been delivered. Everyone wins.
However, note that the use of documentary credit is a complex and difficult process which involves many administrative formalities. In addition, if you export to neighbouring countries, your products will arrive faster than allowed by the financial channel. Our advice: only use an L/C for large-scale transactions.
3. Bank guarantee
A bank guarantee is a form of credit via which your customer or partner’s bank provides a “payment guarantee” when needed. The guarantee applies both to the amount and the payment deadline. Example: your French customer is suddenly experiencing financial difficulties and they have already received your products? In this case, the bank will take their place and pay you in full by the due date. The bank will even compensate you if the underlying contract is terminated or your receivable is contested.
This is not a payment method in the strict sense of the word, but rather an additional guarantee which is particularly useful when large sums of money are involved. On the other hand, it involves additional costs for the party providing the guarantee.
4. Cheques and bills of exchange
Although these payment instruments may seem archaic, in many countries the use of credit instruments like cheques and bills of exchange is still common for international transactions. French, English and American customers won’t be surprised if you offer to pay them by cheque. In Latin America, on the other hand, you will often see bills of exchange. Your customer will use the documents to request that their bank transfer a predetermined sum on a specific date to you (or to a third party). In Germany - the leading export destination for Belgium - you will make a bad impression if you request payment via a debt security. Therefore, be sure to always investigate: every country is different.
5. The current account
It is recommended that you insist on one of the above payment methods for your first orders from a foreign customer. However, over time, you will generally develop sufficient mutual trust and use the simplest, least expensive method, as you would with your domestic customers. A current account consists in first shipping the merchandise then sending an invoice with the payment due date and the general terms and conditions. Your payments will be less secure, but you will have to accept this method for exports to many countries in the EU - often the main export markets. Don’t panic: there are enough instruments in the EU to protect you against bad payers. In addition, this method will provide a competitive advantage over competitors who want to take less risk.