International payments - Some commonly used methods for International Export

When trying to setup an export business (especially one that's intended to be operating at small scale), one has to make some vital decisions. One of them is deciding on a method for collecting payments from an overseas party. Ideally, as an exporter you'd like to collect payment in advance, but advance payments are hard to obtain in international market (in fact it's the same with local markets as well). Unless you have some large, internationally reputable business, you can't expect your seller to trust you with advance payment. But you don't need to worry; there are some other alternatives, though not as secure as advance payments, still reasonably safe. Let's take into account some regularly used ones.

Letter of Credit (LOC):
This is the most widely used and the most recommended method for international export. The biggest advantage of choosing "letter of credit" as your payment method is that it provides security to both buyer and seller; therefore it is equally acceptable for both parties. When all details are finalized between the buyer and seller; the buyer contacts his/her bank and asks for the issuance of "letter of credit". The buyer's bank sends out the LOC to seller's bank. Once the seller is notified, he/she will dispatch the items to the address provided by the buyer. The shipping documents are sent to the buyer's bank via seller's bank. Buyer then make payment to his/her bank, which is transferred to the seller's bank in due time.

Open Account:
Completely opposite to "advance payments" and advisable only if the buyer is extremely trustworthy, open account method allows buyer to pay after he/she has received the products. While at first it may sound like "a risk too big to take", the method is quite common when you are dealing with large established businesses as your buyers, because of their trustworthiness and business history. Still, the method is risky and not practical for exporters who are just starting, for example if the buyer defaults with the payment, you are left in dire straits, especially if you fail to provide sufficient documented proofs in the foreign court.

Document against Payment:
Safer than "open account" but still reasonably risky mode of payment, in this method the goods are shipped by seller, but the buyer can only take the possession when he/she has agreed to the obligation of paying the seller. Two types of collecting documents are normally used, known as "document on payment" and "document on acceptance".

There are some other mediums as well, like credit cards or online payments but those are normally used to make small payments.