Setting up your business to accept payments from international customers through a payment gateway or virtual POS opens the door to enhanced sales, a deeper client pool and the potential for a giant boost to your brand. 

As you contemplate discussing your plans with an international payment processor, one of your first priorities should be to gain an understanding of the most popular ways that businesses like yours accept funds from buyers in foreign countries. 

Learn about the five most popular to make vital decisions about how your company will go forward in the international arena.

1. Cash in advance

As a seller, you are served best when you can receive your money before you ship the buyer’s merchandise. 

The most common ways for these payments to take place are via wire transfers (electronic fund transfers directly into your bank account using a service such as SWIFT), credit cards, online payment platforms and international payment processors that frequently help to facilitate multi currency payments.

Although the merchant realizes significant advantages with this method, buyers tend to view cash in advance payments less positively. 

This is particularly true if the supplier is new on the scene or otherwise unfamiliar to the buyer. This payment method also deprives buyers of the ability to pay with more flexible, long-term arrangements.

2. Letter of credit

A letter of credit (LC), also known as a documentary credit, offers a solution to buyers’ concerns about cash in advance arrangements. 

This type of international payment occurs when the buyer’s legitimate bank makes a binding promise to pay the seller after the terms and conditions of a contract have been satisfied. 

In this arrangement, buyer and seller can place trust in established financial institutions throughout the transaction, and the buyer is not required to send money before getting their goods. LCs are frequently used during large transactions or for those taking place between new trading partners.

An LC transaction contains several steps:

• Both parties agree on the sales terms, including quantity, prices, shipment method and payment type.
• The buyer contacts their bank and completes an application for a letter of credit.
•  If the buyer’s bank deems them to be credit-worthy, the institution issues an LC to the seller’s bank.
• The seller ships the merchandise as specified in the agreement, providing all necessary commercial invoices and other documents.
• The seller lets their bank know that the merchandise has been shipped, presenting all pertinent documents that confirm this fact. These are then forwarded to the buyer’s bank.
• If all is in order, the buyer’s bank will release the payment to the seller’s bank, forwarding all documents to the buyer.
• The buyer receives the goods they have purchased.

A letter of credit protects the buyer since funds are only released after the contract has been satisfied and the goods received. Because it is guaranteed by the buyer’s bank, the risk of outstanding invoices is reduced. 

However, the buyer must pay high fees to have an LC issued. Furthermore, the process requires numerous documents, must follow a strict timeline and can be onerous to complete.

3. Documentary collection

In this method, banks act as intermediaries between buyer and seller to transfer documents such as bills of exchange and commercial invoices. 

Like letters of credit, this arrangement ensures that the seller gets paid and the buyer receives the merchandise to which they are entitled. However, unlike an LC, the banks are only involved during the transaction, with no guarantees in place that the buyer will pay.

The documents can be collected in two ways. In documents against payment (D/P), the buyer must pay in full before receiving the shipping documents and goods. With the documents against acceptance (D/A) arrangement, the seller’s bank tells the buyer’s bank to release all shipping documents to the buyer once a time draft has been accepted to pay by a specific date.

Documentary collection is advantageous to the buyer because it is cheaper than a letter of credit and, when a D/A is used, allows for inspection of the purchased goods before a payment needs to be made. 

For the seller, ownership of goods is only relinquished after a payment is provided. However, there are no guarantees that a payment will take place, and the seller might be forced to pay for the return shipment if the transaction is canceled.

4. Open account

In this arrangement, the seller ships goods to the buyer and receives payment typically within 30, 60 or 90 days after the delivery or invoice date. Foreign buyers appreciate the flexibility and control of their cash flow that this cash-after-receipt model provides. 

However, it can represent significant risk to the seller.

Although sellers may appear disadvantaged by this arrangement, it often attracts buyers who might otherwise be reluctant to do business internationally. They also do not need to deal with the extent of paperwork that occurs with letters of credit or documentary collection. 

On the other hand, the potential for non-payments or late payments can lead to protracted invoice-chasing and the disruption of cash flow.

5. Consignment

In this method, the seller ships goods to the buyer. They retain ownership until the merchandise is sold.

Exporting on consignment is risky since the seller receives no guarantees that they will be paid for the goods they shipped. However, it gives sellers a way to expose foreign customers to their products in a way that is attractive to importers because it allows these distributors to test market demand before bringing in a large purchase. 

On the downside, there is significant potential for disputes, non-payment and limited control over how goods are marketed internationally.

Building a strong infrastructure for your international business is crucial, and nothing is more important than determining the ways that you will accept your customer’s funds. 

Before you make final decisions, consider your business’s unique needs as well as the cultures, customs and preferences of your customers. The more security and flexibility you can furnish, the higher the likelihood that you will attract and retain loyal foreign buyers.