Along with choosing the right transport, the suitable delivery term or trusted logistics agent for your international freight, defining suitable payment methods also deserves equal concern. In fact, the most secure method for exporters is clearly not the case for buyers, making it hard for both sides to reach the consensus on the payment term. To avoid losing your customers due to the lack of flexibility in offering a favorable term, it’s better that exporters/importers understand all the payment methods commonly used in international trade.
This article will explain to you the 4 common methods of payment used in Vietnam and a number of financial systems that can be used for paying Vietnamese suppliers.
1. Cash In Advance
Cash In Advance is a payment method which requires importers to pay fully and before the shipment is received. In Vietnam and other Asian countries, exporters commonly ask for making use of Telegraphic Transfer as an option to pay in advance. Telegraphic Transfer, abbreviated to TT, is the transfer of funds from the importer’s bank account to the exporter’s one by electronic means. The fee could be charged by the sending bank or receiving bank.
While buyers are not willing to agree on this method, it is the most desired one by exporters, however. It is mostly because the sellers could avoid all the risk of default. An example is that when there are problems with order or damages to the shipment, the sellers already have cash in hand and they do not have to worry whether buyers will pay for the goods or not. Besides, in some cases, the buyers are not able to afford prior to the shipment. For these reasons, importers, in contrast, do not favor this term as much as the sellers do.
Consequently, if the sellers insist on this method, chances are they will receive fewer orders or even lose their business to others who are willing to offer favorable terms to their customers flexibly.
What is T/T? How does it work?
A T/T payment is a Telegraphic Transfer or Wire Transfer of funds between banks using the SWIFT system. It is commonly requested by Vietnamese suppliers and is a standard way for importers to send money abroad.
Below is the way T/T payment commonly works:
- You ask the supplier to develop samples until you learn that they are doing properly and exactly what you want.
- You send a 50% deposit (by T/T) before production starts.
- Your supplier (the seller, manufacturer, or exporter) purchases the components and/or materials and arranges the production.
- You work with a third-party agent specializing in product quality inspection (this is optional and you can do it by yourself but it is usually a good idea).
- You send the remaining 50% (by T/T) before shipment.
- The supplier ships the goods and sends you the documents by freight forwarder.
2. Open Account
In contrast to Cash In Advance, Open Account transaction is a sale where the goods are shipped directly to the importers who have agreed to pay for the invoice at a specified day (30, 60, or 90 days after the shipment). It is, therefore, the most beneficial term to the importers while it is the highest risk term to exporters.
Despite disadvantages of this term, it has upsides that the exporters could consider. In particular, since this is an advantageous term for buyers, exporters can offer this term in order to win more customers in the current intense competition, which will help maximize sales and boost business growth.
Although the potential this method has, only offering this term to businesses that you completely trust is highly recommended. Besides, making use of protection like export credit insurance somehow can help you mitigate the risk of commercial losses (default) and political losses (war or non-convertible currency).
3. Letter of Credit
Both Cash In Advance and Open Account cannot satisfy the expectations of exporters and importers since one type that benefits the exporters will not be a favorable one for importers and vice versa. It, therefore, leads to the establishment of other payment methods that can help mitigate risks for both sides. Letter of Credit is one of them, though it’s relatively complicated.
Letters of Credit ensure that payment will be made by the buyer’s bank to the seller as soon as it receives the documents proving all of the terms and conditions expressed in LC have been qualified. This method benefits the seller when the foreign buyer with credit information being hard to obtain works with a creditworthy bank, ensuring the payment has to be made. In the meantime, an LC also protects the importers as they do not have to pay until the goods are shipped as promised. Though this paying method gives advantages to both buyers and sellers, it can be expensive, time consuming and hard to manage the whole process.
How does this paying process work?
- Sale Contract: This process begins with a contract signed between the buyer and seller. All important information such as price, quantity, and the like has to be agreed in this contract.
- Request for Letter of Credit: The buyer will be the one that requests a LC from his/her Issuing Bank. This document has to specify details about beneficiary’s name and address, date of shipment, transport mode and other terms.
- Send Letter of Credit: After issuing the LC according to the buyer’s demand, the Issuing Bank will send this document to the seller’s bank. The beneficiary bank will carefully check all the information to ensure that this document is perfectly correct without any mistake.
- Deliver Letter of Credit: The LC will be delivered to the seller (exporter) to make sure that this document is correct in every detail according to the contract between seller and buyer.
- Deliver Goods: The seller exports goods in compliance with terms and conditions stated in the LC.
- Present Export Documents: Export documents have to be presented fully to the exporter’s bank. The bank has the responsibility to verify whether these documents satisfy terms and conditions of the LC or not. This step must be conducted carefully before passing the documents on to the importer’s bank as the importer’s bank can refuse to pay even with a very tiny mistake.
- Forward Documents to the Issuing Bank: The importer’s bank will give these documents a final check before sending them to Buyer.
- Documents and claim for payment: Importer’s bank forwards documents, claims for payments to the buyer and makes payment to the seller’s bank. The importer then will use these documents to take possession of goods and the seller gets paid.
Depending on the time that the Issuing Bank agrees to make payment for Advising Bank, there are two main types of LC, including LC at sight and Deferred LC.
- LC at sight means that the Issuing Bank makes payment immediately after receiving all the documents and carefully verifying all terms and conditions stated on LC. Vietnamese exporters preferred this option for their trade.
- Deferred LC (after 30, 60, 90 days) means that the Issuing bank on behalf of the buyer pays the seller on a specified future date after completion of the transaction.
4. Documentary Collections
Documentary Collection, abbreviated to D/C, is a transaction that the seller (exporter) delegates the collection of payment to the bank (remitting bank), which also has the responsibility to forward the shipping documents to the buyer’s bank, with instructions to release the documents to the buyer and claim for payment. In order to clear the goods through customs, the buyer has to present shipping documents, which can only be received when the exporter gets payment.
There are two main types of this method, encompassing Document Against Payment and Document Against Acceptance.
- Document against payment means the payment has to be made immediately when the buyer is presented the sight draft.
- Document against acceptance, on the other hand, do not require the buyer to pay immediately but to provide a specified date for payment. This type gives the importer a short amount of time to pay the exporter after receiving goods.
Documentary collection mitigates risks of international trade for both sides. For exporters, only when payment or acceptance has been obtained, the possession of documents is handed over, which means that the exporter remains title of goods until buyers have made payment. For Importers, they have to make payment only after goods are shipped. Besides, this term is less expensive and complicated than its alternative, Letter of Credit.
This term, however, still has a drawback which could affect the seller. In fact, the importer could change their mind and refuse to pay for the goods, leading to other serious problems for the seller. Therefore, compared with Letter of Credit, which could be used even when the foreign importer’s information is hard to obtain, this method should be applied to work with trusted partners.
How does this method work?
This method includes 4 main phases:
- The contract of sale is signed between the exporter and importer, including all key points such as the amount to be paid, delivery date, and payment method which is documentary collection. The exporter then ships goods to the final destination with support of freight forwarder.
- The shipping documents will be prepared and forward to the seller’s bank (remitting bank). This bank then sends these documents to the importer’s bank (collecting bank).
- After receiving the shipping documents of goods, the collecting bank will notify the buyer that the documents have been received. The buyer is requested to make payment by the collecting bank in exchange for the documents.
- When the bank gets paid or the buyer accepts the time draft (pay on a specified date later), the documents of shipping will be released to the buyer.
5. Popular Financial Systems Used For Paying Vietnamese Suppliers
After considering 4 must-know payment methods used in Vietnam, finding suitable services to pay Vietnamese suppliers is highly necessary. There are a number of services that foreign importers can use to make payment for Vietnamese sellers, including:
Western Union is a very popular service for sending money around the globe. Customers can send money by phone, through Western Union website, or in person. Its fees can be attributed to a long list of elements, especially when transferring money internationally.
As Western Union, MoneyGram is also a very popular service for making payments, making it the biggest rival to Western Union. While Western Union considers many factors to decide the amount of money you can transfer such as the origin and destination, your transaction history, type of payment and so on, MoneyGram sets a limit of $10,000 USD for most online transactions. For this reason, many people choose WU over MoneyGram.
Transferwise has bank accounts all over the world linked together by smart technology. This is how it works: When you send USD to Vietnam, just simply log on and pay your USD to the Transferwise VN account. Then this Transferwise VN account sends VN Dong to the recipient. Not only is it very easy to conduct, but it’s also up to 8 times cheaper than using banks.
It could be said that PayPal is the best option to send a small amount of money to someone overseas. It is the most used online payment platform with instant payments. However, PayPal also has its own disadvantage. In fact, its rules are very strict, which means that your account could be suspended easily and locked by PayPal with a very slight suspicion.
These payment methods and services above are the ones that are commonly used in Vietnam as well as other Asian countries. Of these methods, T/T payment and LC irrevocable at sight are mostly chosen by Vietnamese exporters. With the useful information this article provides above, you now have a general view of payment terms and know how to choose a suitable one for your next dispatch.
Along with payment methods, exporters/importers could run into other difficulties when trading internationally. Check out our Vietnam Sourcing blog list below to facilitate your sourcing process from Vietnam right away:
Viego Global – Your trusted sourcing partner in Vietnam
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