open account method provides low risk B u s i n e s s F i n a n c e

open account method provides low risk B u s i n e s s F i n a n c e

Choose two methods of payments and provide three advantages and disadvantages of each method in terms of selling to international customers.

reply to Alannis Pacheco

One of the most common methods of payments when selling internationally is Cash in Advance. This method includes credit card payments and bank wire transfers. While this method is ideal for exporters, it is not as desired by customers. An advantage for exporters is that it is a low risk method, since their payment is secured before shipment. Another advantage is that if there is any problem with the order, they will be able to correct it with that cash rather than possibly experience the customer withholding payment. Lastly, this method allows exporters to receive payment quickly. On the other hand, the disadvantages mainly apply to the customer. If they pay ahead of time, the exporter might keep their money and never ship the item. They might also receive the item damaged or be unhappy and the exporter can possibly refuse to correct the problem. Lastly, some buyers might not be able to afford to pay in advance, which means the exporter can lose a lot of potential customers. This method involves the lowest risk for exporters, but the highest risk for buyers.

Another one of the most common methods of payment is Open Account. Contrary to Cash in Advance, this method involves payment after delivery; typically within 30 to 90 days. This is most beneficial to the importer but is very high risk for the exporter. An advantage is that it can help to maximize potential sales volume, since it is most convenient to the customer. An advantage for the importer is that they will be able to receive and inspect the item before completing a payment. Lastly, the importer has more time to gather funds before having to pay. On the other hand, a disadvantage is that the exporter risks never receiving payment. Another disadvantage is that they might need to spend time and resources conducting credit checks in order to minimize the risk of payment default. The last disadvantage is that it takes much longer for exporters to receive payment. As opposed to Cash in Advance, the Open Account method provides low risk for importers, but high risk for exporters.

More information on these two methods can be found here: https:// (Links to an external site.)

reply to Nydia Delgado

Cash in Advancepaid for the products in advance of delivering your goods to the customer.

Advantages – The exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. Their company is relieved of collection problems and has immediate use of the money. Cash in advance also provides the working capital needed to process the order; there’s no strain on cash flow. It is the least risky form of payment for the exporter, where they get your money at the time of the sale.

Disadvantages – Requiring payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Buyers are often concerned about the possibility that goods paid for in advance will not be sent; another consideration is the reduction in leverage with the seller if goods do not meet specifications. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms.

Letters of Credit (LC)conditional payment method in which the issuing bank promises to pay you once you have complied with all the terms and conditions of the sale

Advantages Using documentary letters of credit allows the seller to significantly reduce the risk of non-payment for delivered goods, by replacing the risk of the buyer with that of the banks. LCs provide security to both the exporter and the buyers because they use banks to receive and check documents and to guarantee payment. The process is relatively simple: the customer obtains an LC from their bank (the issuing bank), which guarantees the exporter will be paid when the conditions of the sales contract have been met.

Disadvantages – When it comes to competitiveness, LCs have a major drawback in that their fees can be very costly for your customer. In addition, the buyer may have to put up collateral with the issuing bank. These funds may be frozen from the day the LC is issued, thus tying up the customer’s cash. Overall, this means requiring an LC can make you less competitive in the eyes of a potential customer. The reliability of payment under the Letter of Credit is dependent on the issuing bank, and amendments are required if there are any changes, hence delaying the transaction. 

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