An accounts payable (AP) shop has enough to worry about when making payments within the United States. When making international payments, complexity is heightened by issues such as currency, foreign language, customs and regulations. Those involved with international payments should be familiar with the payment methods used.

Letter of credit (LC)

An LC, a common form of international payment, is fairly simple. The buyer (purchasing) applies for an LC with its bank. The bank issues the LC to the vendor’s bank, and notifies the vendor that the LC has been issued. The vendor then ships the goods to the buyer. In this scenario, the issuing buyer’s bank pays the vendor’s bank, and the vendor’s bank pays the vendor. The LC stipulates, of course, that the buyer will reimburse its bank.

LCs can be expensive. A bank issuing an LC will usually charge your company a percentage of the value of the goods purchased, which normally amounts to at least a few hundred dollars. (The LC should specify which party is responsible for paying any fees incurred.) Although LCs can be expensive, they are ideal for paying vendors with whom you do not have an established, trusted relationship. It is important to note, however, that the LC does not obligate the vendor to ship the goods — that obligation should be contained in the underlying contract, which is separate from the LC.

Open account

An open account is also a fairly common form of international payment. With an open account, the vendor simply ships the goods with an invoice. This method can only be agreed upon if your vendors trust your company a great deal, but open account is the ideal way for AP to pay those vendors. In order to establish such relationships, careful attention must be given to vendor relations.

Payment in advance

Your vendors may adore you if you use payment in advance, but it is not a method that many AP professionals recommend. If your department is going to employ such a high-risk process, you must be absolutely certain of the vendor’s integrity. With payment in advance, you pay via wire transfer; you might consider paying half up front and half upon delivery. Once satisfied with the supplier, you can negotiate different terms. Payment in advance might be your only option if it is a smaller transaction and you are unable to obtain an LC.

Documents for collection

Like an open account or payment in advance, documents for collection are used when the buyer and seller have established a high level of trust, however the scenario works more like the LC. The vendor’s bank will send the shipping documents (bills of exchange) to your bank. Your bank will hand the bills of exchange to you when either you pay for them or when it accepts bills of exchange payable at some date in the future as agreed between the two parties. Your bank does not make any promise of payment but simply agrees to hand the shipping documents to you under the terms stipulated by the vendor.

Questions to ask your bank

If you are new to international payments, start by asking your bank about your options. Key questions to ask include:

1. What are the deadlines for receiving payment instructions, processing transactions, and settling or clearing transactions?
2. What level of automation is available?
• Are you able to receive and process bulk payment files?
• Do you have “straight-through” processing (no manual intervention within the bank)?
• Are you able to receive a file from an intermediary bank?
3. How and when does the bank communicate problems with transactions? What level of technical support is available?
4. Which currencies are supported in your multi-currency accounts?
5. How is the FX applied and at what rates?