International Trade Finance: Tools & Payment Methods for Exporters

In the dynamic world of international trade, financing plays a fundamental role. From small businesses export financing to multinational conglomerates, all require financial resources to conduct global business transactions. International trade finance encompasses a wide range of instruments and tools designed to facilitate and support cross-border commercial operations. From letters of credit and export credit insurance and structured financing, these financial solutions are vital for mitigating risks, driving business growth, and promoting trade exchange between countries.

In this section, we will explore in detail the fascinating world of international trade finance, its different types of payment methods for international trade, financing for exporters, and mention some financial entities that carry out these international operations.

* This web page is for reference, so if you want better information about export payment methods or trade finance for exporters and financing international trade you should contact a national or international financial institution.

Export Payment Methods

International payment methods are previously negotiated agreements between the exporter and the importer to determine when the payment process begins and when the payment is made for the exported goods or services. The timing of payment is related to the shipment and delivery of the goods and/or services.

Main International Payment Methods

Advance Payment: As the name suggests, it is the international payment made before the shipment of the merchandise. For the exporter, it is the safest payment system, as they send the goods or services after receiving the international transfer.

Payment on Sight: This form of payment for export occurs when the exporter presents the shipping documents of the goods.

Payment in Installments: It is the payment made on an agreed date to the exporter after delivering the shipping documents to the importer. This period is generally determined by the shipping date, the invoice, or the presentation of documents.

Open Account: It is a payment method in which the exporter sends the goods, shipping documents, and invoice to the importer, then waits for the corresponding payment. Unlike advance payment, the open account is the riskiest for the exporter but secure for the importer.

These types of payment methods in international trade are closely related to the level of trust between the exporter and importer, which is an important characteristic. They also depend on the political, economic, and social environment of the countries where the parties involved are located.

Secure Payment Tools for Exporters

International transfers

One of the means of direct international payment made by the importer through payment orders that it requests from its bank to be transferred to the exporter’s accounts, without requesting any documentation that proves the merchandise or services.

Characteristic:

Open account method of payment method in international trade (frequent use).
The exporter’s bank acts only as the recipient of the funds.
There must be broad trust between those involved (exporter and importer).
Use of international identification codes such as SWIFT and ABBA, alphanumeric code of 8 or 11 characters and numeric code of 9 digits respectively. The latter exclusive within the United States.

Benefits:
Much cheaper means of payment than a collection or letter of credit.
Safe transfer of funds.
Direct payment.

Documentary collections

Financial instrument by which the bank, at the request of the exporter, collects the commercial and/or financial documents related to the sale of merchandise or services abroad. These documents are then delivered to the importer upon payment.

Characteristc:

The bank assumes no responsibility or commitment.
Payment can be at sight or term.
There are three types: simple documentary and guaranteed collection.
There must be a good degree of trust between the exporter and importer.
Collection can be at sight or term.

Benefits:

It can be used as guarantee instruments in the case of a collection endorsed by the importing bank.
Safe delivery of documentation to the importer only against payment.
The bank acts as the representative of the exporter.

Letters of Credit

The international letter of credit is a commercial document in which the importer’s bank commits to pay the exporting company an agreed-upon amount either immediately (at sight) or in installments, provided that the conditions specified in the commercial letter of credit are met.

International letters of credit can be categorized based on their payment terms—either at sight or in installments—and the level of commitment to payment.

In addition to the standard international letter of credit, there is also the standby letter of credit. This international payment mean serves as a guarantee for the exporter, as any default by the other party enables the exporter to enforce it. Standby letters of credit are commonly used in international bidding processes

Characteristic:

The conditions cannot be changed or canceled without the agreement of both parties.
Useful when establishing a new relationship with an importer or exporter.

Benefits:

It is the safest, most reliable and most agile means of payment.
Guarantees the fulfillment of the purchase / sale of merchandise.
It is governed by international stardards issued by the ICC.
Payment obligation as stipulated in the letter of credit.
Payment is in dollars or another foreign currency.

Export Financing Options

Export advance

The ‘Export Advance‘ is a form of financing international trade that entails a partial or total advance of funds provided to the exporter by a financial institution every time an export of goods or services is made. This advance is intended to cover the costs associated with the production, packaging, and shipment of the products destined for export. It is an effective solution for financing international payments, whether in dollars or another currency.

Characteristic:

You must have either the purchase orden or an export letter of credit.
Financing terms are typically 180 days.
Financing is provided against an export collection or a letter of credit.
Banks charge a percentage of the documents for financing.
The financing is terminated as soon as the funds are received by the importer.

Benefits:

Immediate liquidity for the production of the merchandise to be exported.
It represents an advance payment of part or all of the sale abroad.
Withdrawal of funds is possible within a few days depending on the conformity of the documentation.
Provides solvency to the company for long-term selling.

International factoring

Factoring international trade is a service of international invoice factoring, where an exporting company sells its invoices to international factoring companies (banks or foreign factoring companies) in exchange for a cash advance. This allows exporting companies to obtain immediate liquidity instead of waiting for customers to pay their invoices. Subsequently, international factoring companies handle the collection of international invoices and assume the risk of non-payment

Characteristic:

This instrument must be accepted by the importer.
A discount rate applies.
Short-term financing.
The term is typically around 6 months on average.
There must be a bank or international factoring company located in the importer´s country.
The purchase and sale contract serves as a guarantee.

Benefits:

Transfers the risk of insolvency to the bank, if it is nonrecourse factoring.
Cost savings associated with credit.
Availability of funds from credit sales.
Improves the cash flow of the exporting company.
Access to immediate liquidity.
Does not incur debt.
Facilitates obtaining a factoring line of credit.

Forfaiting

International forfaiting is a form of financing for exporters of goods or services. Through forfaiting, a financial institution purchases, with or without recourse, from the exporter a payment instrument, such as a promissory note or a bill of exchange, originating from a commercial transaction of buying and selling a good or service.

In the non-recourse modality, any default in payment by the obligor will be fully assumed by the bank providing the financing. Thus, international forfaiting allows for the immediate conversion of medium and long-term deferred payment credits and transactions into cash

Characteristic:

The bank assumes the risk of insolvency.
International forfaiting operations are non-recourse.
Instrument primarily dedicated to foreign trade.
Term range from 6 months to 5 years for the invoice collection..
Accepetd documents are letters of credit established and notified for collections with letters guaranteed by international financial entities.

Benefit:

Minimizes exchange rate and interest rate risks.
Provides advance funds to exporting companies.
Improves the payment terms that exporters can offer to importer.
Accessible to non credit exporters.
Provides 100 % financing for the operation.
Enhances the cash flow of the exporting company.

Best Banks for Trade Finance

We present a list of international bankS for exporters from Italy, United Kingdom, China, Germany, Japan, Mexico, Spain y the United States of America that provide a wide range of products for financing international trade, enabling companies of all sizes to make and receive international transfers for payments and collections. Additionally, these international banks provide options for obtaining trade finance for exporters and imports

It is important to mention that several of these international trade banks have been included in the list of the Best Bank in the world 2023, compiled by Forbes. Additionally, several international banks from this list are affiliated with a major international factoring chain (FCI factoring *).

ITALY

GERMANY

Deutsche Factoring Bank*

CHINA

Bank of China *

China Merchants Bank

Bank of Communications *