This is certainly the most preferred form of payment from the exporter’s point of view; it not only eliminates the risk of not being paid but also eliminates the need to verify the creditworthiness of the importer or the ability of the importing country to remit the foreign exchange to the exporter. Unfortunately, importers are seldom willing to pay for goods in advance because the entire financial burden and associated risks rest with him and he can only hope and trust that the exporter will deliver the goods as ordered. However, if you are in a very strong baragaining position (for example, you are the only supplier of the goods or the only company that currently has stock), you may be able to negotiate payment in advance for all or part of the shipment.
Alternatively, an understanding importer (but be aware that there are not many of them around) may be prepared to pay for part of the contract price in advance as evidence of goodwill. This provides you with some security that you will be paid and helps to fund the cost of your production and shipping. At the same time, it allows the buyer the opportunity to check the quality of the goods before parting with the rest of their money. This will need to be negotiated with the importer, but don’t count on it in the competitive environment we operate in.
The benefits of payment in advance
With payment in advance, you have no risks and bear none of the financing costs. There is no additional cost to you beyond the costs involved in any export transaction. Payment or part payment in advance is typically used for low value sales to individuals or new customers. Payment in advance is also common when selling over the Internet. If you wish to buy a book from Amazon.com, you would by credit card and only once you have paid, would the books be dispatched to you. It is a realistic alternative payment method for small exporters that sell rather unique items such as art work, and most overseas buyers will be willing to use this method of payment if the amounts involved are small (and hence, the risk is small).
When is payment in advance appropriate?
Importers may consider payment in advance and exporters can generally ask for payment in advance, when:
- There is a strong seller’s market for the product in question or when the products are being manufactured to non-standard specifications.
- It would be impossible to sell the goods onto a third party if the importer were to cancel the order.
- Relatively small amounts of money are involved which the importer may feel would not warrant the expense of arranging payment by a more formal method such as a letter of credit.
- Large capital projects are undertaken. In these circumstances, it is often the practice for an importer to make a down payment and subsequently to make progress payments as the work reaches specified stages of completion.
- In order for the exporter to achieve this method of payment it would be necessary for the importer to have complete trust in the exporter; knowing that he would supply the product/s in strict accordance to his order.
Alternative ways of making cash payments
There are essentially six ways of making a cash payment. these are:
- Importer’s own cheque
- Banker’s draft
- Mail transfer
- Telegraphic transfer
- SWIFT payments
- Credit card payment