5 ways to pay your international suppliers

22 October 2020

When an importer wishes to pay a foreign supplier, it uses an international payment method or carries out a documentary transaction. Payment methods falling into this bracket include bank transfers, cheques, clean drafts or SEPA Direct Debit (SDD) operations for SEPA countries. As far as documentary transactions are concerned, we pay particular attention to documentary credit as this type of transaction enables an importer to secure the delivery of goods.

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Bank Transfer

This is a payment made by the debtor to settle their invoice. Paying a supplier or several suppliers by bank transfer before receiving the goods is known as an advance payment. The risk for the importer, in this instance, is that they ultimately do not receive the goods or that the goods are not delivered as expected. The opposite phenomenon, whereby the supplier ships the goods before receiving payment, is referred to as open account trading. Here, the exporter runs the risk of not being paid.

  • Advantages: this payment method is universal and can be used for all types of transactions. It is very flexible and fast.
  • Disadvantages: bank transfers are initiated by those making the payment. This requires a trusting relationship between both payer and payee.

I want to make a transfer to a supplier

 
Cheques

Cheques may be defined as a mandate given by the drawer (importer), who instructs the drawee (their bank), to pay the exporter (the beneficiary). In accordance with these commands, the cheque is then given to the supplier, who will present it to his bank in order to cash it, thus eliminating the drawer's debt.

  • Advantages: "European" cheques are subject to the provisions of the 1930 Geneva Convention, while "Anglo-Saxon" cheques are governed by "Common Law". Cheques remain a cheap method of payment.
  • Disadvantages: beyond the fact that you have to physically go to the bank in order to cash them, cheques must be initiated by those making the payment, with few countries maintaining regulation that protects the beneficiary. Payment reversal on the drawer side is also a possibility.
 
Clean draft

Within this category, there are two main types of negotiable instrument. The bill of exchange and the promissory note.

  • A bill of exchange is a document issued by the drawer (exporter), who orders the drawee (importer) to pay the amount due on a specific date.
  • The promissory note is a document issued by the drawee in which they undertake to pay the drawer the amount due on a given date.

The beneficiary submits both the bill of exchange and the promissory to their bank, which subsequently handles the collection.

  • Advantages: the issuance of a bill of exchange is up to the beneficiary. This bill of exchange incorporates the buyer's debt and can be easily discounted, just like the promissory note.
  • Disadvantages: this mechanism is little known in some countries and does not guarantee final payment.

 

SEPA B2B Direct Debit and CORE

A direct debit enables creditors to immediately collect the funds either for one-off or recurring invoices, be it for telephone, gas or electricity bills, or indeed subscriptions. With the debtors’ prior agreement, expenses and invoices are paid automatically. The obligor client does not have to carry out payments manually. Europe-based direct debit relies on the intervention of four parties. The four are composed of the debtor, the creditor, the debtor's bank and the creditor's bank. There are two distinct schemes, SEPA Core Direct Debit and SEPA B2B Direct Debit, which result in 2 different types of deduction.

  • Core Direct Debit allows you to collect from both private and corporate debtors. Accepting SDD Core Direct Debit is mandatory for banks in the SEPA zone.
  • B2B Direct Debit (SDD B2B) can only be used for corporate debtors. This method of direct debit is irrevocable, but it requires the debtor company to inform their bank in advance.

 

Documentary credit

The principle of documentary credit is the commitment of the importing party’s bank to pay a specified amount to the exporter sending the goods. The supplier must provide this bank (the importer's bank) with compliant documents proving the shipment of goods. This type of transaction is also valid for a service.

  • Advantages: documentary credit is the only payment technique combining a means of payment with a payment guarantee for the supplier. It is used during a first-time operation with a new supplier to compensate for any lack of confidence and to guarantee the importer receipt of their goods.
  • Disadvantages: this payment technique can be expensive. Documentary credit may be either irrevocable or revocable, and this is pending on the agreement of all parties involved.

 

These different means of payment present different levels of risk from the importer's point of view. Payment in advance is the riskiest form of payment since you pay your supplier before you receive the goods. On the contrary, open account trading is the least risky means of payment because the supplier is only paid once the goods have been received. In addition to the risk of whether or not the goods are received, there is also the problem of exchange rate risk. If your American supplier sends you invoices in dollars you will have to convert your euros into dollars. The exchange rate for this transaction, if it is not in your favour on the day, may affect your commercial margins. In order to secure your margins, by locking in an exchange rate for a future transaction, there are payment institutions specialising in foreign exchange transactions that offer significantly more attractive exchange rates than banks. Such institutions also allow you to make your international payments at a lower cost.

Topics: Finance

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