What are the pros and cons for advance payment on Imports/Exports transactions?

With this payment method, the exporter can avoid credit risk, since payment is received prior to the transfer of ownership of the goods. However, requiring payment in advance is the least attractive option for the buyer, as this method creates cash flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters that insist on this method of payment as their sole method of doing business may find themselves losing out to competitors who may be willing to offer more attractive payment terms.

Hello Marilou

Payments between Exporters and importers are  an age old problem. Over time  businesses have tried to come up and devised various methods to solve this problem, but sadly none of the solutions are fool proof. Every method has their pros and cons especially since  import/export are companies that are situated by countries, in other words it is going to be an INTER country transaction. And in accordance to the international law in the event of a troubled transaction, is not only cumbersome but also expensive.

One common thread that would bind these transactions would be trust between the two parties involved  irrespective of the payment method used.

Coming to the core question you have asked in regards to the pros and cons of  advance payments between the importer and the exporter, which used to be the norm in the early days and is still in practice specially for smaller transactions and if the exporter has representatives.

Pros for the Buyer –

-          Can negotiate a much better price from the seller

Cons for the Buyer –

-          Quality issues

-          Can receive wrong product

-          Might just not receive anything

Pretty much be on the mercy of the Exporter.

Pros for the Exporter –

-          Uses buyers money to manufacture, in short solves his cash flow problems, and in turn has no upper cap for the revenue.

-          Gets an upper hand in the transaction

-       Has no risk since he is already paid for the goods. 

Cons for the exporter

-          Pretty much nil except for the fact that the exporter can become relaxed in his approach and which could in turn hurt the quality or other features.

Hope that answers your question, and please feel free to ask any more questions or if you need further in depth information on this.

advance payment allow the Factory to purchase material and starting proceeding the goods on demand 

and they will have  some liquidity  for Export / Import purpose .

the disadvantage of this advance term both party may have cancel and loss the deal of business for some reasons 

the alternative solution for this idea is to have LC for both Importer & Exporter 

Advance payment can be made through beneficiary bank (Importer) by making terms and condition in draft which will be forwarded to issuing bank (exporter) based on receiving shipping documents.

Based on the value of commercial documents the advance payment will be credited to supplier and balance on completion of their order in same procedures.

Risk of losing your advance can be prevented by making letter of credit .   

without advance payment there is no any gauranty that buyer will buy ordered  goods.so all sellers needs advance payment from buyers to start manufavturing or ship the goods

Advance payment more favorable to Supplier more preferred option will be Letter of credit transactions which will be beneficial for supplier as well as buyer If the value is very small it is ok to go with advance payment.