Companies involved in international business use different payment methods for different transactions. Each trade transaction may be paid with a different instrument depending on the value of the transaction, the tenor, how strong the relationship between the buyer and seller is, the countries of origin of the parties, and other factors.
Companies buying or selling overseas have four alternatives to process the payments of their international trade transactions: Cash in Advance, Open Account, Letters of Credit, and Documentary Collections. Cash in Advance and Open Account are addressed by Santander’s International Wire service. Each payment method has different levels of risk for your company, depending on whether you are importing or exporting.
Wires are used for international payments when the transaction is arranged as Open Account or Cash in Advance. Open Account is the least secure payment method for the exporter since the shipping will be made in advance of payment. However, it is the most secure alternative for the importer. On the other hand, Cash in Advance is the safest payment method for the seller because it will receive the funds before the shipment of the goods. Usually, Cash in Advance and Open Account payments are only used when the relationship between buyer and seller is consolidated, and each party relies on the other party's good faith.
To address your company’s need of payment in Open Account or Cash in Advance, Santander Bank, N.A. (“Santander”) offers you an electronic payment system to facilitate your International Wire needs, both incoming and outgoing, in an efficient and timely manner. With Santander’s online banking platform, you can initiate US dollar or foreign currency wire transfers that will go directly to your client’s overseas bank account.
You may also execute wire transfers over the phone through Santander’s Wire Room or at any of Santander’s 720 branches across the Northeast U.S.
In some countries, it is still common for companies to deliver payment with checks. For international trade payments, this method will only be used when the sales contract has Open Account or Cash in Advance terms. Santander offers you the possibility of using personal or bank checks for both payments and collections.
Personal checks: They are linked to a checking account and are issued and signed by the owner of the account. In trade transactions that involve personal checks to process the payments, the exporter does not have guarantee of payment despite having received the check, as this will depend on the legality of the signature of the drawer, and the existence of funds in the account. The collection of a personal check is subject to the laws of the country of the importer, and not every country allows overseas payment through this instrument.
Bank checks (a.k.a. cashier’s check): They are issued by the importer’s bank in favor of the exporter. It provides a higher level of security for the exporter because the bank will assume responsibility for the payment.
Documentary Collections are a cross-border payment method in which Santander and a foreign bank act as intermediaries in the collection of trade payments. With this method, the exporter’s bank remits shipping documents to the importer’s bank, which are only released to the importer against partial or full payment or by signing a time draft (Acceptance). They are also known as Cash against Documents or, if the payment is received at a later date, Documents against Acceptance.
As an importer, Documentary Collections allow you to maintain control over authorizing payment and reduce the non-delivery risk, as payment is only made once the shipment of the goods has been made.
As an exporter, you have the security of having documents and payments controlled by intermediary banks until payment is made or a draft is processed. You also have the convenience of initiating Direct Collections via the Internet with SovTrade, Santander’s online trade platform.
Documentary Collections are governed by internationally accepted rules and subject to the Uniform Rules for Collections (URC 522) created by the International Chamber of Commerce.
Letters of Credit (LCs) are one of the most secure methods of selling and purchasing goods overseas. Payment is made to the seller only after shipment and the related documents have been reviewed and determined to be compliant with the requirements specified in the Letter of Credit. Unlike Documentary Collections, when a Letter of Credit is issued by a bank on behalf of the importer, the bank is committed to pay to the exporter if the shipping documents comply with the terms of the Letter of Credit.
As an importer, you guarantee payment to your supplier, if in compliance, by substituting the credit risk of your company for Santander’s credit risk. You also have the convenience of initiating Letters of Credit and amendments via the Internet utilizing SovTrade.
As an exporter, you minimize your risk of nonpayment when selling overseas. You also have the possibility of having Santander confirm your export Letter of Credit. This provides a greater degree of protection by mitigating foreign risk. By confirming the Letter of Credit, Santander substitutes the issuing bank’s credit risk for its own, protecting you from these risks.
Letters of Credit are governed by internationally accepted rules and subject to the Uniform Customs and Practice for Documentary Credits (UCP 600) created by the International Chamber of Commerce.
Irrevocable Letters of Credit: According to the UCP 600, Letters of Credit are always irrevocable, even when the wording does not implicitly state it. This means that a Letter of Credit can never be cancelled or modified unless all the parties involved (buyer, seller, and the banks) otherwise agree
Confirmed Letters of Credit: A Letter of Credit will be confirmed when the bank of the exporter adds its confirmation to a Letter of Credit issued for the benefit of its client. This confirmation entails that the confirming bank will substitute its credit for that of the issuing bank, protecting the seller from the other bank’s risk.
Advised Letters of Credit: When a Letter of Credit is not confirmed, the exporter’s bank will merely be an intermediary, not assuming any obligation and limiting its responsibility to advise the Letter of Credit.
Time Letters of Credit: The payment will be made after a certain number of days from a specific date (in most cases, the shipping date).
Sight Letters of Credit: The payment will be made upon the presentation of the required documents if they comply with the Letter of Credit terms.
Banker’s Acceptance: A Letter of Credit will have a Banker’s Acceptance when the bank of the buyer accepts it. By accepting the draft, the accepting bank assumes an unconditional obligation to pay the face amount of the draft at maturity.
Negotiated Letter of Credit: A Letter of Credit will be negotiated when one of the banks discounts the amount of the Letter of Credit to the seller. If it is the seller’s bank who discounts the transaction, they will request the buyer’s bank to accept the draft (create a Banker’s Acceptance). This way, the exporter’s bank, who is discounting, will assume the risk of the other bank, rather than the risk of the buyer.