With the cash-in-advance payment method, the exporter can eliminate credit risk or the risk of non-payment since payment is received before the goods are shipped. For international sales, wire transfers are the most secure and commonly used cash-in-advance option available to exporters. For small international consumer transactions, credit cards are a viable cash-in-advance option. Advance payment by check is a less attractive option for exporters because of the potentially lengthy and complicated collection process. For exporters and their importers who demand assurance that the goods will be sent in exchange for advance payment, cross-border escrow services may be a mutually agreeable cash-in-advance alternative.
However, cash-in-advance is the least attractive option for the importer because it tends to create cash-flow problems for their business. Importers are also concerned that the goods may not be sent if payment is made in advance. Moreover, cash-in-advance is not often a competitive option for the exporter especially when the importer has other vendors to choose from. Thus, 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.
Characteristics of Cash-in-Advance
Applicability: Recommended for use in high-risk trade relationships or export markets, and appropriate for small export transactions.
Risk: Exporter is exposed to virtually no risk as the burden of risk is placed almost completely on the importer.
Pros: Payment before shipment and improved cash flow. Eliminates the risk of non-payment.
Cons: May lose customers to competitors over payment terms. No additional earnings through financing operations.
Key Points
• Full or significant partial payment is required, usually via credit card or wire transfer before the goods are shipped.
• Cash-in-advance, especially a wire transfer, is the most secure and least risky method of international trading for exporters and, consequently, the least secure and most unattractive method for importers.
• Credit cards are a viable cash-in-advance option, especially for small consumer transactions.
• Payment by check is a less attractive cash-in-advance option because the collection process can be lengthy and complicated.
• Exporters may pursue cross-border escrow services as a mutually agreeable cash-in-advance alternative for transactions with importers who demand assurance that the goods will be sent in exchange for advance payment.
• Insisting on cash-in-advance could, ultimately, cause exporters to lose customers to competitors who are willing to offer more favorable payment terms.
• Creditworthy importers, who prefer greater security and better cash utilization, may find cash-in-advance unacceptable and simply walk away from the deal.
Wire Transfer: Most Secure and Preferred Cash-in-Advance Method
International wire transfers are common and almost immediate. Exporters should provide clear routing instructions to the importer when using this method, including the receiving bank’s name and address, SWIFT (Society for Worldwide Interbank Financial Telecommunication) address, and ABA (American Bankers Association) number, as well as the seller’s name and address, bank account title, and account number. The fees for an international wire transfer can be paid by the sender or they will be taken by the banks as deductions from the amount sent.
Credit Card: A Viable Cash-in-Advance Method
Exporters who sell directly to foreign customers may select credit cards as a viable cash-in-advance option, especially for small consumer transactions. Exporters should check with their credit card companies for specific rules on the international use of credit cards because not all banks will accept cross-border credit card payments from all countries, and the rules governing international credit card transactions differ from those for domestic use. In addition, exporters may face significant fees, depending on the size of the transaction and the countries involved. Furthermore, because international credit card transactions are typically placed using the Web, telephone, or fax, which facilitate fraudulent transactions, proper precautions should be taken to determine the validity of transactions before the goods are shipped. Although exporters must absorb the fees charged by credit card companies and take the risk of unfounded disputes, credit cards may help businesses grow because of their convenience.
Payment by Check: A Less-Attractive Cash-in-Advance Method
Advance payment by check mailed to the exporter may result in a lengthy collection delay of several weeks to months. Therefore, this method may defeat the original intention of receiving payment before shipment. If the check is in U.S. dollars and drawn from a U.S. bank, the collection process is the same as for any U.S. check. However, as with domestic checks, funds deposited by non-local checks, especially those totaling more than $5,525 on any one day, may not become available for withdrawal for up to nine business days under Regulation CC of the Federal Reserve (12 CFR § 229.13(a)(1)(ii)). In addition, if the check is in a foreign currency or drawn from a foreign bank, the collection process can become more complicated and can significantly delay the availability of funds. Moreover, if the shipment is made before the check is collected, there is a risk that the check may be returned due to insufficient funds in the buyer’s account or even because of a stop-payment order.
Cross-border Escrow Service: A Mutually Agreeable Cash-in-Advance Alternative
Exporters may pursue cross-border escrow services as a mutually agreeable cash-in-advance alternative for small transactions with importers who demand assurance that the goods will be sent in exchange for advance payment. Escrow in international trade is a service that allows both exporter and importer to protect a transaction by placing the funds in the hands of a trusted third party until a specified set of conditions is met.
Here’s how it works: the importer sends the agreed amount to the cross-border escrow service provider. 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. Once accepted, the funds are released by the cross-border escrow service provider to the exporter.
The importer, if not satisfied with the goods, must return the goods in a satisfactory condition to the exporter in order to obtain a refund from the escrow agent. The cost can either be paid in full by one party or split evenly between the exporter and the importer. In the United States, cross-border escrow services are mostly offered by a small set of Internet-based non-bank financial services providers.
When to Use Cash-in-Advance Terms
• The importer is a new customer and/or has a less-established operating history.
• The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.
• The political and commercial risks of the importer’s home country are very high.
• The exporter’s product is unique, not available elsewhere, or in heavy demand.
• The exporter operates an Internet-based business where the acceptance of credit card payments is a must to remain competitive.
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