Whether you are importing goods from abroad or selling to international buyers, the question of payment is an important one that must be answered early. However, due to the often-complicated nature of international trade, payment in these circumstances is not often straightforward.
There are several complex processes involved, and plenty of options to consider for how these payments can be made – usually called payment terms or methods of payment. Add the fact that the payment terms you pick can be a factor in determining how attractive your offer is, and things get even more unpredictable.
What are the types of payment methods you should know, and how do they compare with one another? This guide takes a deep dive into payment terms in international trade, including their meaning, how they work, and how to decide what’s best for you.
Payment terms in international trade
When it comes to international trade, the process of buying and selling can be prolonged, and often complicated. So, it’s understandable to feel relieved after concluding a sale with the other party and agreeing on a price. But agreeing on a price is only one part of the payment process. You still need to agree on how payment will be made, and when. This is where payment terms come in.
Payment terms are the conditions that parties in international trade agree on to complete payment. They are often referred to as the methods of payment that exporters and importers can utilize to finalize their trade deal. Payment terms deal with many important issues relating to the trade deal. These include whether payment will be made before delivery, who retains ownership of the goods before delivery, and how payment will be made1.
Obviously, payment is an important part of getting a profitable trade whether you’re exporting or importing goods. But the payment terms that are utilized can play an even more important role in attracting good trades in the first place, especially for sellers. Buyers ideally want to delay payment as much as possible, preferably until they receive or even sell the goods. Sellers also want to collect payment as early as possible, ideally before they send the goods or immediately upon receipt. All of this makes finding the right payment terms a balancing act that both parties want to get just right.
With that said, let us move next to the types of payment terms in international trade and how they work.
