Our series of articles on international payment methods has discussed the major payment approaches in use today including letters of credit, documentary drafts, escrow and cash in advance.
Our final article in this series discusses several less common methods of payment that may have value in your business.
An open account is very much like a credit account in your own country. When a buyer and seller use an open account, the seller sends goods to the buyer along with a bill which the buyer is expected to pay under the agreed upon terms, e.g., within 30 or 60 days. This is a simple and convenient system but an arrangement that requires a good deal of faith in the buyer to make payment. The open account option is usually reserved for buyers who are well-established with the seller, have long and favorable payment records or have been thoroughly checked for creditworthiness.
There are a number of risks to the seller in an open account arrangement. In the absence of documentation or bank involvement, it may be difficult for the seller to pursue payment through the courts. The seller may also be forced to pursue payment in a foreign country, which is more difficult and expensive. Finally, the seller may not be able to finance receivables in the absence of written agreements such as a trade acceptance (See article on documentary drafts) or letter of credit (See article on letters of credit).
Consignment means that goods are provided from the seller to the ‘buyer’ (who acts more like a seller representative) but the seller continues to own the goods. If the ‘buyer’ sells the goods, the title to the goods transfers and the seller is paid for the merchandise. If the goods are not sold, they may be returned to the seller after a specified period of time. Consignment can be a great value to the buyer/representative who has access to merchandise without upfront payment and little risk if the goods don’t sell (except, perhaps, transport costs). Consignment places significant risk on the seller who loses physical control of the merchandise and has limited or no control over when payment will be made.
Sellers who plan to use consignment sales should consider risk insurance to cover possible losses.
International countertrade is a trade practice in which one party accepts goods, services, or other instruments of trade in partial or whole payment for its products.
Countertrading is most prevalent when there are issues around foreign currency exchange or there are no better mechanisms for establishing trading situations. Smaller sellers and buyers can use countertrading tactics if they can agree on the relative cost of the goods and services they are trading.
Businesses that counter purchase agree to purchase each other’s goods or services in a sort of swap for equal or near monetary value.
An alternative form of counter trade is bartering, i.e. trading goods or services of equal value. For example, an IT consulting firm trades IT software support for assistance in web design or business plan development. Bartering can be an excellent way for two parties to take advantage of the assets they have in excess or can provide less expensively to get services or materials that another business is in a position to offer at a benefit to themselves.
For more information on countertrade in the UK, go to http://www.londoncountertrade.org/links.htm. If you are located in the United States, you can contact the Financial Services and Countertrade Division/Office of Finance, International Trade Administration, U.S. Department of Commerce, Washington, D.C. 20230; 202-482-4471.