Free Online Course in International BusinessComparing Methods of Payment and RiskThe following chart offers a comparison from lowest to highest risk to an exporter/seller and importer/buyer (permission to use image, granted by Wm Hindon, VP, JP Morgan, 2004). The following chart lists the methods of payment discussed in the prior section in risk order to both the exporter (seller) and importer (buyer). On the left side of the chart, you see the risk evaluation of the methods of payment from the perspective of an exporter or seller. For example, selling products or services on a “cash in advance” basis has a low uncertainty” or “low risk” to the seller because “cash” or funds are made available to the seller prior to the sale. A letter of credit, next on the “level of certainty/uncertainty” scale, is also a sound method of payment, although there could be discrepancies in the documents that could possibly affect payment. The same applies to the documentary collections. When “open account,” the last item on the list, is considered as to an exporter’s certainty/uncertainty of payment, the international manager should understand that by agreeing to “open account” (selling on net 30 day payment terms) there is a risk element of when and if payment will be made. On the right side of the chart, you can see the level of uncertainty in terms of payment made by the importer or buyer. For example, if the importer (buyer) pays “cash in advance” for a product or service, the “uncertainty” is that money is paid before the product/service is available. What if there is a quality problem or delay in receiving the product or service which has already been paid for by the buyer? The buyer has no recourse. At the other end of the scale, the buyer has a low level of “uncertainty” if he/she has been “given” open account (30 days to pay) for product or service that has been delivered. The buyer has the product/service but has not yet paid for the invoice. SummaryThis discussion has focused on how to identify a variety of payment methods available to a risk manager. Businesses who sell in the 21st century global market appreciate that secured transactions are not only way transact business when selling internationally if they want to be both competitive and grow their business. A significant responsibility of a credit manager is to understand the use of the various payment terms in a competitive business environment. However, an international manager is not the only person who needs to learn to describe and apply the various payment methods that will apply to buyers. Senior financial management of the seller as well as the “business” people – marketing, operations – are well advised to seek information as to payment decisions with buyers so that they are able to evaluate payment terms. Payment terms are an important component of the relationship with buyers. A pro active international manager involves other business units and individuals, such as those in sale management, not only in the process of “why” certain credit terms are determined for a buyer, but also “how” they are determined. Even though in most organizations the credit risk group has the responsibility of establishing and determining payment terms of customers, good business judgment in an organization should be exercised by bringing in internal customers to the decision process since they have stakes in the relationship with existing or potential buyers.ResourcesUS Dept of Commerce – www.export.gov MSU Globaledge Modules – http://globaledge.msu.edu Export Financing – Receiving Payment
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