Cash in advance (CIA) is a payment method in international trade. Cash in advance is also known as cash with order or advance payment by most exporters and importers.
- One of the main characteristics of a cash in advance payment is that the full order amount will be paid by the importer to the exporter prior to the transfer of ownership of the goods.
- In most cases, exporters demand significant advance payments on order confirmation in order to protect themselves against order cancellations. Some common phrases stipulated in sales contracts to this effect are as follows:
- %50 of proforma invoice total will be paid on order confirmation, remaining %50 will be paid 1 week before shipment.
- %30 of proforma invoice total will be paid 1 week after order confirmation, remaining %70 will be paid against copy of shipment documents send via e-mail or fax.
- Cash in advance payment is the most secure payment method in international trade for exporters, because it eliminates non payment risk especially when money transfer is done via wire transfer.
- By paying total value of the goods before shipment, importers have to bear some risks such as;
- non shipment risks
- low quality goods
- non compliance risks
- custom clearance risks
Cash in Advance Payment Rules:
There is no set of rules exists that governs cash in advance payment used in international trade.
Both UCP 600 and URC 522 is published by ICC (International Chamber of Commerce). On the other hand ICC has not published any rules for the cash in advance payments.
For this reason, exporters and importers have to identify cash in advance payment details on the proforma invoice in order to prevent misunderstandings and possible mistakes.
Payment Settlement Methods for Cash in Advance Payment:
Wire Transfer: Wire transfer is the most secure and preferred cash-in-advance payment settlement method used in international trade transactions.
A wire transfer is an electronic payment service for transferring funds by wire for example, through the Federal Reserve Wire Network or the Clearing House Interbank Payments System (CHIPS). (1)
Wire transfer can either be sent via online banking or traditional banking applications.
In order to complete an international wire transfer correctly you need to specify below details;
- Currency of the wire transfer and wire transfer total
- Name of the account holder:
- Full Name and address of the bank:
- Bank Branch:
- Account number:
- Swift Code: SWIFT is the short form of “Society for Worldwide Interbank Financial Telecommunication”. SWIFT is an industry-owned co-operative supplying secure, standardized messaging services and interface software to nearly 8,100 financial institutions in 207 countries and territories. SWIFT members include banks, broker-dealers and investment managers. While not always required, a SWIFT Code (also known as BIC Code) may be required by some banks for the completion of wire transfers.
- IBAN Number: (if applicable) The International Bank Account Number (IBAN) is the international standard for identifying international bank accounts across national borders. The IBAN is comprised of a maximum of 27 alphanumeric characters within Europe and a maximum of 34 outside of Europe (German IBAN: 22 characters). At present, the United States does not participate in IBAN. Therefore, US banks do not have an IBAN number.
Credit Card: For small scale orders credit cards could be used as a viable cash-in-advance payment method in international trade.
As international credit card transactions are typically placed via online, telephone, or fax methods that facilitate fraudulent transactions, proper precautions should be taken to determine the validity of transactions before the goods are shipped.
Although exporters must endure the fees charged by credit card companies, this option may help the business grow because of its convenience.
Payment by Check: Advance payment using an international check may result in a lengthy collection delay of several weeks to months.
Therefore, this method may diminish the original intention of receiving the payment before the shipment.
Moreover, there is always a risk that a check may be returned due to insufficient funds in the buyer’s account.
As a result payment by check is a less-attractive cash-in-advance settlement method in international trade finance.
- Wire Transfers FAQs, Bank of America, https://www.bankofamerica.com/deposits/wire-transfers-faqs/