There are four main methods of payment, varying in security. The method you choose should be determined by the credit checks you have made regarding your customer and the degree of risk you are prepared – or can afford – to take. Below is a summary of each method so you can weigh up the risks and benefits.
Being paid in advance of delivery ensures that you receive full payment before shipment of the goods and is therefore the most secure method.
One way of reducing the risk of non-payment is to request a letter of credit from your customer. It is issued by your customer’s bank and guarantees that payment will be made, so offers a high level of security. You will also need to agree to certain terms set out by the bank e.g. providing documents as proof that you have supplied the goods for which you have been contracted. For extra security, you may prefer to ask a UK bank to confirm your customer’s letter of credit. This will ensure that your UK bank will make the payment in the event that your customer’s bank doesn’t. It is also advisable to obtain an irrevocable letter of credit. It cannot then be changed or cancelled unless all parties are in agreement. A revocable letter of credit, however, can be changed or cancelled by the bank at any time.
Bank documentary collection is a recognised procedure used in international trade in which a bank in your customer’s country acts on your behalf to collect payment for your goods. The bank will take receipt of all shipping and collection documents (sent via your own bank), handing them over to your customer in exchange for payment of goods. You receive your payment and your customer has the necessary documents to collect the goods.
An open account is where you agree to ship the goods to your customer and issue an invoice for payment, usually quoting a credit period such as ‘30 days from date of invoice’. The risk here is obvious and this method is reliant on trust and a good business relationship.