Exporting to Malaysia: Variety of the Payment Methods
Source: nst.com
Export transactions involve various payment methods, chosen through mutual agreement between the exporter and importer. This ensures both parties are comfortable with the chosen method. Each of these payments has its own weaknesses and disadvantages depending on the point of view of the importer or exporter. In this article, we will learn about some payment methods commonly used by Malaysian importers.
Letter of Credit
L/C or Letter of Credit is a document sent from a bank or financial institution that guarantees that a seller will receive the buyer’s payment on time for the full amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan). This payment method may be very secure and recommended for your first export activities but, L/C involves additional cost and complexity.
Cash in Advance
Cash in advance allows exporters to mitigate credit risk by receiving payment before transferring the ownership of goods. Upfront payment is generally unfavorable for importers due to cash-flow issues. Exporters often require cash in advance when faced with uncertainty or difficulty verifying the importer's creditworthiness. Additionally, high political and commercial risks in the importer's home country can also lead to a cash-in-advance requirement. This payment method is usually used when the importers have gained their trust with the exporters through the number of items that have been delivered properly and safely by the exporters to the importers.
Open Accounts
Open account is a payment method where the exporter ships the goods and extends credit to the importer. It allows the importer to make the payment at a later agreed-upon date. Open account is the most common export payment method. It is popular for its simplicity and convenience for both buyer and seller. It is an attractive choice for established business relationships. However, despite being the most common payment method in the world, open accounts present the highest risk for sellers. This is because the seller has no guarantee of payment until after the buyer receives the goods. As a result, open accounts rely heavily on trust between the parties involved.
In conclusion, these three methods (cash in advance, letters of credit, and open accounts) are the most commonly used by Malaysian importers. To build trust and a positive image when exporting to Malaysia, consider requiring a credit rating from one of the two local credit rating agencies: RAM Ratings or Malaysian Rating Corporation Limited (MARC). This step demonstrates your commitment to a secure and transparent transaction.
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