In today’s competitive global market, it is vital to provide appropriate payment terms that are secure and beneficial to both buyers (importers) and sellers (exporters), no matter what products are to be sold internationally.
We always have this problem with the import of toys. The importer wants to receive the goods before payment, and the exporter intends to receive the compensation before delivery.
So this is where the method of payment comes in. Before parties confirm the order, they must negotiate the payment method.
The following five main trade payment methods are for your reference.
1.Cash advance
2.T/t
3.The l/c
4.Payment by d/p
5.Open account
Cash advance
The cash advance method is the safest and most advantageous for toy exporters because they are paid safely before the goods are shipped, and the title is transferred. And there is no need to pay the cost required by the toy exporter, which will also generate a lot of interest expenses.
They are usually paid by wire transfer, credit card, or cash for a small number of customers. However, this is the least ideal method for toy importers, as there is a risk that the goods will not be delivered or that the goods received by the importer will not be guaranteed. It is not suitable for commercial cash flow, so cash advances are usually only used for small purchases.
Advantages and disadvantages of a cash advance:
1.Toy exporters are not affected.
2.Toy importers have a direct impact on cash flow management.
3.There is no risk of receiving the goods. If the goods do not arrive, there is little recourse. Otherwise, it will be a disaster area for insurance.
T/T (Telegraphic Transfer)
Telegraphic transfer (T/T) is a method by which the remitter instructs the remitting bank to pay a certain amount to the payee of the remitting bank by telegram or telex. There are two kinds of T/T.
The pre-T/T means that after the contract is signed, a part of the deposit is paid first, usually 30%. After the production is finished, the notice is paid, the balance is paid off, the goods are shipped, and the whole set of documents is delivered. However, the former T/T is relatively rare and appears more in European and American countries.
T/T will receive the deposit, arrange the production and shipment, and pay the balance after the customer gets a copy of the documents. The seller will send a complete set of documents after receiving the credit.
Compared with the front T/T, the importer prefers the back T/T, which is more secure.
L/C (Letter of Credit)
A letter of credit, or documentary credit, is a bank’s promise to pay the exporter if all the contract terms are adequately enforced. It’s one of the safest ways to pay.
Letter of credit is the most commonly used payment method in international trade. The letter of credit can be said to be an S/C guaranteed by the bank. As long as you follow the items in this contract one by one, you must pay the money to the bank if you provide the corresponding documents. These terms and conditions are usually contained in the credit itself and relate primarily to inspecting the accompanying document rather than the goods themselves.
A letter of credit is primarily applicable when the import and export parties have a new and unexamined trade relationship. They are also a good option when the exporter’s reputation to the importer cannot confirm this. Toy importers can customize the payment terms and can pay after receiving the goods. Either way, L/C provides the exporter with less risk because it has strict documentation requirements and a reliable guarantee of payment.
However, this method of payment also has its disadvantages. First, it is generally considered very expensive because the banks involved usually charge a lot of fees, which is both time-consuming and laborious. Costs will vary according to the importer’s credit rating and the complexity of the transaction.
In addition, banks generally do not inspect exporters’ shipments. It means that there may be no regulations to determine the quality of goods during production.
In theory, L/C is a very safe method of payment. However, in practice, sometimes the letter of credit is not that safe, and there may be soft clauses that are difficult for you to achieve, resulting in artificial discrepancies.
T/T versus L/C
1.T/T is simpler and more flexible than L/C. Tight delivery time, change of packaging, etc., don’t matter as long as the customer agrees. In the case of the L/C, this is quite troublesome, and the L/C must be corrected; otherwise, the discrepancy may occur, and the client may refuse payment.
2. Another feature of T/T is that the cost is lower than L/C.The bank deduction fee is relatively small, generally dozens of dollars. And letters of credit can sometimes amount to several hundred dollars. Therefore, the quotation of T/T made by some factories is lower than that of L/C. However, generally speaking, if the document is well done, it is more reliable than T/T, and the payment is guaranteed by the bank.
Depending on the letter of credit, you can go to the bank to package the loan with little financial pressure. However, in countries with poor bank credit or strict foreign exchange control, L/C risks are significant, such as India.
Both T/T and L/C have their advantages and disadvantages. If T/T and L/C are combined, it will be safer.
D/P
D/P is a method of document delivery under the documentary collection. It means that the presentation of documents is conditional on the importer’s payment; that is, the importer can only collect the documents from the bank after payment. It is divided into D/P and D/A.
D/P – A draft is drawn at sight by the mouth and presented to the importer by the collecting bank. The importer must make payment upon presentation. When the payment is made, the importer will get the shipping documents.
D/A – Documents against Acceptance is a method by which the exporter (or the collecting bank) delivers documents to the importer on condition of acceptance under the documentary collection. This method of settlement is risky for exporters.
D/P Payment and D/A payment are less used. Mainly because these two payment methods belong to commercial credit, the export company receives the payment depending entirely on the credit of the importer. Also, if the importer can receive the goods in time, quality and quantity also rely on the exporter’s credit. Therefore, these two payment methods are used mainly by importers and exporters with good reputations.
Open account (O/A)
This payment term involves a trade agreement in which the exporter agrees to deliver the goods to the importer and does not receive payment until later. Payment is usually due after an agreed period, 30, 60, or 90 days after delivery. Thus, the importer gets the goods on credit and pays for them at a later agreed time.
Obviously, this method of payment is advantageous to the importer because they enjoy the position of taking delivery of the goods without paying. This can reduce their operating expenses because they can simply order goods and try to sell them entirely before paying the exporter. It also reduces their need for working capital, as they don’t have to worry about freeing up funds to complete payments before taking delivery.
Because of these advantages, importers always try to find exporters that offer open account payment terms. In a buyer’s market (a market with more goods and less demand), open account terms become the primary payment method. Exporters may be more willing to offer these terms if they also want to show trust in or attract valuable customers.
However, you should bear in mind that opening an account is also risky for exporters. In this transaction, the risk of non-payment, late payment, bankruptcy, and other contingencies is very high. In addition, exporters have to produce and ship goods without receiving payment. That could leave them with less working capital than they would like. All in all, this method of payment may put exporters in a very delicate position.
Factors to consider when choosing the payment method
Due to the different characteristics of various payment methods, the following factors should be considered when choosing the appropriate payment method.
1.The customer’s credit rating: If the customer’s credit rating is average or if it is the first transaction between the two parties, the L/C method should be used.
2.The supply and demand of goods are different: If the goods are sold well, the seller may choose the payment method in his own favor, such as asking for an L/C settlement or even asking the buyer to pay in advance.
3.Selected trade terms and the contract amount: Different trade terms have various liability provisions and risk sharing for the buyers and sellers. Therefore, appropriate payment methods should be selected according to different trade terms. In addition, if the contract amount is not large, it can be considered to choose the faster, low-cost T/T or plain bill collection.
When you import toys, the choice of payment method is a direct result of whether the exporter can get the money safely and quickly. In the choice, they not only consider their own risk but also the cost of the other side, trying to achieve a win-win situation.
Therefore, according to the credit rating of the other party, the supply and demand of the goods, the level of the contract amount, the mode and type of transportation, the level of the financial settlement cost, and other factors to decide. At the same time, the flexible use of the combination, comprehensive payment methods can be used to settle international trade to disperse the risk of settlement.
ZHXTOYS has established a good relationship with customers in more than 60 countries worldwide. Please contact us if you have any needs, and we will try our best to help you.