Foreign exchange payments

GUIDE TO: Making safe international payments

You’ve done your homework. You have identified the product you want to import, you have found out what selling price your competitors charge and you have identified your supplier.

Now it’s time to place your first main order and pay your supplier. But are you sure you and your business are protected form non-delivery? Experienced importers will know exactly how to make safe international payments, but many first timers have run into problems.

Let’s look at the various mechanisms available for making international payments, as well as how you can avoid some common pitfalls.

As the globe is becoming smaller and international trade is becoming easily accessible, the issue of moving money safely and cost effectively across borders now affects most businesses and individuals at some time.

Being knowledgeable in the different payment methods available can alleviate risk and reduce money transfer costs. Below is a summary of the most common and trusted payment methods as well as what to consider when making or receiving payments.

Considerations when choosing a Payment Method:

When choosing your payment method the following criteria must be taken into consideration: security, acceptability by the buyer and seller, transaction costs, and ease of use.

As with all trade, there are some risks that need to be considered.

Commercial risks:

Exporters run the risk of non-payment for merchandise after it has been exported. Importers run the risk of making payment and then not receiving the merchandise, or receiving faulty merchandise.

Political risks: If the country supplying or purchasing merchandise undergoes political instability or war, trade with that country may no longer be possible.

Transfer risks: When currencies are exchanged, the bank in the local country needs to have a sufficient amount of each currency to make the exchange. It occasionally happens that banks in third world countries run out of foreign currency. Should this happen payment will be delayed by the bank until the foreign currency is available.

To meet the various needs of the buyer and the seller a number of payment methods are available and are discussed below. In addition to choosing a suitable payment method a valid contract between buyer and seller is required. In trade law two agreeing documents, such as the purchase order and invoice, is deemed a valid contract. Alternatively, for large transactions, a sales contact may be drawn up by an international trade lawyer.

Have a question?

Get in touch

Tools for transferring Money Internationally:

Transfers through a local bank:

International payments or receipts can be facilitated by the foreign exchange section of your local bank. Some banks have international payment facilities as part of their internet banking offering. Alternatively you can contact your private banker, business banker or visit your closest bank branch with a foreign exchange division.

Your bank will require the following information from you:

  • Your FICA information. If you are using your local bank they should already have these documents.
  • The reason for the international transfer.
  • Your import or export license number as well as the commercial invoice for the sale.
  • For payments; the bank will need the banking details, SWIFT code and address of the receiving bank.
  • The bank’s international transfer forms need to be completed and signed.

Once submitted, the bank will process all the relevant information and book the exchange rate. Exchange rates fluctuate constantly and there is little control in regards to exactly when the rate  is booked. This results in a small exchange rate exposure risk for the duration of the process. After the exchange rate is booked the bank will arrange payment. This whole process usually takes 2-5 days.

The banks have a set fee structure for foreign exchange transactions. Clients are charged as follows:

  • An administration fee is charged for the transaction. This fee varies depending on the amount that is exchanged. Both the buyer’s bank and the seller’s bank charge a fee. The buyer can choose whether or not he will pay the seller’s bank’s fee.
  • The bank’s add a margin or mark-up on the foreign exchange. The exchange rate quoted by the bank is usually the SPOT exchange rate plus 1.5% – 2%

A better fee structure can be negotiated with a bank only if the volume and frequency of the international payments an account holder makes is sufficient to attract a better fee. The more money transferred, the better the fee structure.

Transfers through a foreign exchange account:

Foreign exchange accounts, also called switching accounts, are registered to a business or individual, but managed by a foreign exchange broker. Foreign exchange brokers work on pre-negotiated exchange rates and fees made possible by the sheer volume of currency they trade on a daily basis.

This is why international payments made via a foreign exchange accounts generally get better exchange rates and a lower commissions offered by a forex dealer translates to as much as 75% less spent on the transaction bank fees and up to a 2% saving on the payment overall.

Interested in opening your own foreign exchange account?

Thanks to an extensive network of foreign exchange providers, we’ve pinpointed brokers who specialize in:

  • Micro to macro-size transactions in line with all businesses and personal imports and exports.
  • Forward Exchange Contracts, which give you control of the exchange rate at which you pay.
  • Setting up offshore accounts.
  • Managing international payments according your (not the bank’s) best interest.

A foreign exchange account registered under these dedicated forex brokers incurs no monthly fees, and offers you a better, easier way of managing international payments PLUS significant savings.

In addition you get personalised service from a dedicated foreign exchange broker who knows you, your company, and your goals in international trade.

Open your foreign exchange account

Credit Card Payments

Using a credit card for international payments is common for smaller transactions. Credit Card payments are quick and convenient. Payment is typically made using an online, secured payment portal.

Credit card foreign exchange administration fees are charged according to the standard fee structure from your credit card supplier and cannot be negotiated.

Due to fraudulent activities associated with credit card transactions, should you choose to make use of this method of payment please make sure that your merchant and the portal you are use are valid and secure.

Payment Methods used in International Trade:

Cash before or after delivery of merchandise

Importers favour cash on delivery for merchandise to eliminate risks and improve their cash flow. For the same reason Exporters prefer merchandise to be paid in full before it leaves their premises. When considering payment before or on delivery of goods, carefully evaluate reliability of the supplier or buyer. This is a convenient method of payment and is often used when there is a strong trust relationship between buyer and seller.

Typically, buyers use bank transfers or credit cards to facilitate payment. You can also use a foreign exchange (switching) account managed by a broker.

Open account

If the buyer is well established, has a long and favourable payment record, or has been thoroughly checked for creditworthiness an open account may be a simple and convenient way to conduct payment. In this method the buyer orders the merchandise as required and makes payment after an agreed time period.

In this method the seller carries all the cash flow pressure and the risk. It is generally only used when the business of the buyer is significant enough to outweigh these downsides.

Open account payments are typically made by bank transfer.

Letters of Credit (LC)

Letters of Credit are used to protect both the buyer and the seller. A Letter of Credit is defined as:

“A definite undertaking of the opening bank to honour a complying presentation”.

It is seen as a guarantee of payment which is issued by the buyer’s bank once all sales, transport and clearing documents have been received as indicated in the letter of credit. Some of the standard documents required in a Letter of Credit are:

  1. Conformity certificates
  2. Proof of carrier receipts
  3. Insurance documents
  4. Inspection documents

Letters of Credit work in the following way:

  1. A Letter of Credit is issued by the buyer’s bank.
  2. The Letter of Credit drawn up with the terms and conditions that must be met for payment to occur. This includes a list of documentary proof.
  3. The Letter of Credit is given to the supplier.
  4. The supplier accepts the Letter of Credit and sends the goods to the buyer.
  5. The supplier takes the documents required in the Letter of Credit to his bank.
  6. The bank checks the documents and makes sure they comply with the Letter of Credit and then sends the documents on to the buyer’s bank.
  7. The buyer’s bank checks the documents and, if it satisfies the terms specified, pays the supplier.

When working with letters of credit check the following:

  • Letters of credit are governed by an international body called the UCP (Uniform Customs and Practice for Documentary Credits). This must be stated on the letter of credit.
  • LCs normally have an expiry date, ensure that the date stated on the LC gives the seller enough time to have the required documents sent to the buyers bank.
  • If the documents presented to the buyer’s bank are incorrect the bank is under no obligation to pay.
  • If you are not experienced in working with LCs it is recommended that you use a company, freight agent, banking consultant or legal consultant that is experienced in letter of credit terms and conditions to avoid any problems with making or receiving you international payments.
  • If the seller is concerned about the inability of the buyer’s bank to pay due to political instability or lack of foreign exchange in the buyer’s country, the seller can request that the LC be confirmed by a second bank. This is called a confirmed letter of credit. The second bank guarantees payment should the first bank not be able to make payment. The second bank is typically a bank in the seller’s country or in a first world country.
  • When choosing this method of payment, take into consideration the fees charged by the banks for letters of credit. . The fees as well as the entity responsible for payment of the administration fees should be stated on the LC.

Documentary Bank Collections

Documentary collections are similar to Letters of Credit in that the seller’s bank collects payment from the buyer on behalf of the seller against the delivery of the documents. The major difference between the letter of credit and documentary collections is that, for documentary collections, the buyer’s bank does not guarantee payment.

Payment security is provided to the seller in one of two ways:

  1. As per the LC the required documents (such as shipping documents etc.) are sent to the buyer’s bank. The buyer’s bank agrees to give the documents to the buyer only after the buyer has authorised payment. Without these documents the buyer cannot clear the merchandise at customs.
  2. The bank agrees to give the buyer the required documents upon the buyer signing a Bill of Exchange. A Bill of Exchange is an unconditional order to pay. It is acceptable in the international court and enforcement upon non-payment is immediate. A bill of exchange is often used to ensure international payments after an agreed period such as 30, 60 or 90 days.

When working with documentary collections check the following:

  • Documentary collections are governed by an international body called the URC (Uniform Rules for Collection). This must be stated on the contract of sale.
  • The terms and conditions on the documentary collections need to be agreed upon in the contact of sale.
  • If you are not experienced in working with documentary collections it is recommended that you use a company, freight agent, banking consultant or legal consultant that is experienced in international payments and their conditions.

Escrow

Escrow has become a popular method of making international payments due to e-commerce.

In an escrow agreement the money is placed with a trusted third party so that both the buyer and the supplier are protected. The third party in this scenario is often a service provider or online platform specialised in connecting international suppliers and buyers.

Once both parties verify that the transaction has been completed according to the terms of the agreement, the money is released by the third party to the seller.

If, at any point, there is a dispute between the parties in the transaction, the process moves along to dispute resolution governed by the third party. The outcome of the dispute resolution process will decide what happens to money in escrow.

International payments to the third party is typically made by bank transfer or credit card.

By weighing up the risks and benefits around security, acceptability by buyer and seller, cost and ease of use for each of the above payment methods you can make a calculated decision on the payment method best suited to your business or transaction.

Find more help with your import logistics, original resources, leading-edge training, and assistance with customs licenses on Trade Logistics.