Cash in Advance
With the Cash in Advance payment method, importer pays Exporter prior to shipment of goods. Shipping documents are handled directly by importer and exporter.
Characteristics of Advance Payment
- Importer has risk that exporter may not ship the goods as ordered
- Exporter receives payment before shipment, there is no risk of non-payment
- Exporter may lose customers to competitors over payment terms
- Used occasionally for small amounts, new customers, one-time transaction.
The exporter can eliminate credit risk or the risk of non-payment since payment is received prior to the transfer of ownership of the goods. It often is not a competitive option for the exporter especially when the importer has other vendors to choose from. In addition, foreign buyers are often concerned that the goods may not be sent if payment is made in advance.
For the importer, payment in advance is the least attractive option, because it tends to create cash-flow problems. The importer must trust that the exporter will ship the goods on time and that the goods will be delivered as ordered. Cash-in- advance terms place all of the risk with the importer/buyer.
When to Use Cash-in-Advance Terms
- The importer is a new customer and/or has a less-established operating history.
- The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.
- The political and commercial risks of the importer’s home country are very high.
- The exporter’s product is unique, not available elsewhere, or in heavy demand.
- The exporter operates an Internet-based business where the acceptance of credit card payments is a must to remain competitive.
Payment through Cash-in-Advance method
Full or significant partial payment is required, usually via credit card or bank or wire transfer or escrow service, before the ownership of the goods is transferred.
- Cash-in-advance, especially a wire transfer, is the most secure and least risky method of international trading for exporters and, consequently, the least secure and an unattractive method for importers. However, both the credit risk and the competitive landscape must be considered.
- Exporters may select credit cards as a viable cash-in-advance option, especially for small consumer goods transactions.
- Exporters may also select escrow services as a mutually beneficial cash-in-advance option for small transactions with importers who demand assurance that the goods will be sent in exchange for advance payment.