Any firm that engages in international trade and investment is called international business.
Evidently, international business has created a global economy by today’s environment. Partners, customers, vendors and employees can be found all around the world. It’s not unusual to find a company with headquarter in Europe, manufacturing operations in Asiaor South America, distribution channels in North America and resources in multiple countries. The business model paradigm has shifted from being “international” with sales and operations in a few foreign countries to being “global” with businesses managing core structural operations from multiple places around the world with little regard to borders. If only that was the case with cross-borderpayments. Cross-border payments and the need to conduct foreign exchange is an integral part of doing business today, with approximately $3.2 trillion changing hands daily (Wade, R. 2009)
Handling international payment can be complicated and risky. Different nations have different monetary units, and the currency of one country often cannot be used for making payments in another country.
There areseveral terms and conditions in an international sales contract and a number of different payment methods for foreign commerce. However, for some people it is still confusing to understand which price and method of payment terms can prevent any risk for their business. For the seller, they would like to collect enough money after delivering the goods and at the same time, the buyer would alsolike to get the goods after paying the money. Nowadays, international firms need to be careful about what type of international payment method they will use or accept. It’s imperative to keep in mind that it's difficult to assess long distance creditworthiness and even more difficult to collect payment if the buyer or shipper defaults across an international border.
2. Handling InternationalPayments
Which method of payment will be acceptable should be related to the company’s reasons for going internationally in the firs place, the strategy for market entrance and growth (international for exporters, domestic for importers) the resources available for and being devoted to the international effort and the expected return (including monetary, leveraging or domestic operations, expansionof brand/image, etc). Furthermore as with developing and implementing an overall strategy, flexibility is a key to working out acceptable methods of payment. Different buyers and sellers, different markets, different times of the year and different products will all require different approaches. It is non uncommon for a seller to use several methods of payments for different transactions with asingle buyer. For instance, in a distributor relationship, the distributor may purchase samples on open account, while the main order may be paid for with a Letter of Credit. (Anonymus, World Trade; 1999).
Therefore it’s important to understand several methods of payment and the different forms within those methods taking into account their advantages and time consequences and think about thesubject of method of payment early on in negotiations with foreign partners.
Also learning about which method and form of payment they are acceptable or preferred by a foreign partner can teach a lot about the partner’s own strategy and goals and that partner’s financial abilities.
Both exporters and importers need to be familiar with the different methods available for receiving and forwardingpayments. The party that will be able to dictate the terms of sale will change depending on the different international relationships. Therefore any company dealing internationally, weather selling, buying or both, needs to understand fully how the different methods of payment work, their pros and cons, the risks involved with each method and how to lessen those risks.
3. Open Account
This is the...