Ultimately, every exporter is entering the international market in the pursuit of profits and growth. However, key to achieving success when exporting is being able to assess the risk posed by a particular export transaction and taking steps to mitigating that risk. Mitigating the risks of a particular export transaction could include negotiating the use of a suitable Incoterm®, selecting an appropriate mode of transport or taking out the right marine insurance cover. However, none of these do much to mitigate the risk of you not getting paid! As we discussed in our previous articles on payment methods used in international trade, the payment method you and your buyer agree to heavily influences your risk of non-payment. This article highlights the difference between payment terms and payment methods, and discusses the use of open accounts when exporting.
Payment Methods vs Payment Terms
Whereas payment methods relate to the manner in which payment is made, payment terms relate to when payment must be made. For example, this might be in advance of goods being produced, immediately upon presentation of documents to the bank, or at some future date, such as 30 or 60 days from the date goods were shipped. The longer the payment term, the longer an exporter is exposed to the risk of non-payment.
Open Account as your chosen Payment Method
Open account involves you shipping the goods to your buyer on the understanding that they will pay you after a specified number of days. You therefore are not protected in any way against the risk of your buyer simply deciding not to pay upon receipt of the goods. However, open account could be considered as a payment method if the exporter and importer enjoy a longstanding and trusting business relationship, and the exporter is absolutely confident that the importer will pay as agreed.
Your ability to manage financial risk and maximise opportunities heavily influences your international success. However, very few exporters know the full extent of the danger they face in the global market. As an exporter, you must understand how to mitigate your risk. Thankfully, Trade Forward Southern Africa, in collaboration with the International Trade Institute of Southern Africa, has created a free and comprehensive online training course on various aspects of global trade, including identifying and mitigating international financial risk. The modules provided include training on international finance, foreign exchange rates, Letters of Credit, international payment methods and Incoterms®. Click the links below to sign up for free and get started.
To sign up to the School of Export CLICK HERE.
If you already have a profile, CLICK HERE to login to begin the module.