How to Pay Your International Suppliers - What You Need to Know

There are several options for paying your international suppliers. Do you know which one is best? Choosing the right way to pay your suppliers can save you a lot of money. Find out what all the possibilities are in this article.

What are the most common payment types?

One of the most challenging aspects when buying abroad is managing international business payments. As a company, you will want to have the best conditions in terms of payment timings, shipment and cash flow management, so there are different options that you should assess when paying bills from suppliers in other countries:

Cash in advance payment: it is the payment to your supplier before the stock is shipped. This normally requires an upfront payment when making the order, a second payment before the merchandise is shipped, and a final payment when the ship arrives at port. From a buyer's perspective, advance payments are also used to negotiate better conditions with suppliers. This means obtaining a percentage discount on the total amount or better timings in terms of shipments.

Letter of credit: also known as a documentary credit. This is a commitment by the purchaser’s bank to pay an agreed amount to the supplier under meeting specific conditions that both parties agree on. This method is a more reliable method than the sales contract, as it includes credit information from the buyer and eliminates legal uncertainties on discrepant documents. On the other hand, it will also have inconveniences such as bigger paperwork to fulfil as well as more costs associated with the agreement.

Documentary collection: this option gives the responsibility to the vendor’s bank to collect the documents and payments instruction from the buyer’s bank under the requirement of the vendor. It is mandatory to generate a bill of exchange that will be used as an agreement. It is a cheaper method than the letter of credit and provides less safety to the supplier in terms of payment and verification processes

Open Account trading: this payment method is generated when the buyer has a powerful position against its supplier. It allows the buyer to pay the shipment in 30, 60 or 90 days from a specific agreed date From a buyer's perspective, it is advantageous as it allows them to better manage their cash flow by reducing the amount of cash that they have to pay in advance. On the other hand, this is a riskier option for vendors as they have to cover all the production and shipment costs themselves.

What should be taken into account when paying suppliers?

Once your company has negotiated whether to pay in advance, by letter or in credit, you will have to take into account other aspects of the payments to your international suppliers that might affect your costs.

You will need to set a currency which will be used to make the transaction. Depending on the currencies of the parties’ countries, there will be incentives to negotiate in one of the parties' specific currencies. The most common currencies to pay invoices are USD, EUR and GBP. Make sure that the currency is included in the invoice to avoid misunderstandings.

You will also have to take care of the foreign exchange rate and payment costs. There are multiple ways to move the money from your bank account to that of the supplier, so you will have to find out which one is more suitable for your company:

Bank transfer is the most common payment method. Even though it is the easiest method, it is substantially more costly than other options both in terms of payment and exchange fees.

Paypal/credit card are other payment methods that you might take into account when paying your international vendors. These payments are also expensive and provide very low transparency.

Fx intermediaries (non-banks): these are specialized solutions that will allow you to pay your international suppliers. Even though these operations are often secure, they can lead to potential problems in terms of increasing change rates, delays, etc.

Peer 2 peer currency transfer: these platforms allow you to pay internationally transfers more quickly and cheaply than banks. They have potential problems as they do not have a full security system in place, and rates are not the most competitive in the market.

Multi-currency wallets: allow for balances to be held in different currencies, typically have the most competitive fx and payment fees, and allow for fast and easy execution of transactions.

Understanding all the specificities of the fx billing can be very challenging, but it can help your company save big amounts of money and be faster and more efficient when paying international suppliers.

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