As an exporter, you can eliminate credit risk, or the risk of non-payment from foreign buyers, with the cash-in-advance payment method. Cash-in-advance is the most secure method of payment for the exporter because the importer pays the full or a significant amount of the payment before the goods are shipped. Payment is usually made via wire transfer, credit card, or escrow service.
Cash-in-advance is recommended in high-risk trade relationships or export markets, particularly for small export transactions for which other payment methods may not be cost-effective. Cash-in-advance is also less burdensome than a letter of credit, and has less risk for the exporter than an open account. However, requiring payment in advance is the least attractive option for the buyer. Exporters who insist on cash-in-advance as their sole payment method for doing business may lose out to competitors who are willing to offer more attractive payment terms. Depending on the sales opportunity, an exporter may also need to consider other terms of payment.
Cash-in-advance payment: options on how to get paid:
- A Wire Transfer is the most secure and preferred cash-in-advance option for exporters. It’s commonly used, and typically one of the quickest options. Exporters should provide clear bank routing instructions to the importer when using this option.
- A Credit Card is a viable cash-in-advance option, especially for small consumer goods transactions and exporters with e-commerce businesses.
- An Escrow Service is a cash-in-advance option that can benefit and protect both parties. It places the funds with a trusted third party until the specified conditions are met—namely that goods have been sent in exchange for advance payment.
There are international banks and firms that specialize in cross-border escrow and other deposit and custody services. Before choosing a service provider with your importer, check that the escrow service firm is appropriately licensed or accredited.The exporter or the importer can pay the escrow fee, or they can split it evenly.
Here’s how an escrow service works:
- The importer sends the agreed amount to the escrow service.
- After payment is verified, the exporter is instructed to ship the goods
- Upon delivery, the importer has a pre-determined amount of time to inspect and accept the goods for example five days.
- Once the importer accepts the goods or after the inspection period is over, the funds are released by the escrow service to the exporter under the agreed upon terms.
- If, during the inspection period, the buyer returns the goods, the exporter would not receive payment.
In summary, exporters should consider using the cash-in-advance method in the following situations: The importer is a new customer or has a less-established purchasing history. the importer’s creditworthiness is doubtful or unverifiable, the political and commercial risk in the importer’s country is high, or the exporter’s product is unique, not available elsewhere, or in heavy demand.