Advance payment

Further on, we now come to the first method of trade settlement/ payment

In the ever so fluid landscape of business, the market dynamics, the demand and supply change ever so rapidly, especially when we have such an interconnected world.

In a business situation wherein the market dynamics and the demand and supply, lean more towards the seller, this method of trade settlement is most often seen.

The market practise requires the buyer to make the payment of the goods in advance, and against which, the goods are shipped by the seller. The advance payment made by the supplier/seller is often a certain percentage of the total invoice, or in some cases on a 100% basis.

One often gets to see this settlement method applied where the buyer is a smaller SME business and the seller, a well established company. Also in cases where the seller demands a market share of the particular type of goods, and has a certain monopoly.

This method of trade settlement poses certain risks to the parties, which we shall see below….

Risks for buyer

1. Payment risk – the buyer has made a payment to the seller, however, is not sure if the goods are being shipped or not.
2. Performance risk – the buyer is also at risk, in terms of the quality, quantity, and the description of goods that are being shipped, as the buyer is not in a position to check this.
3. Opportunity risk – based on certain commitments by the seller, in terms of shipment date etc., the buyer in turn has business commitments to their customers. The opportunity risk lingers, if the seller does not ship the goods in a timely manner

Risks for seller

1. If the payment is done in advance at 100% of the invoice value, there is no perceived risk of the seller, however, if the trade terms are agreed at a lesser percentage, then the seller carries the risk of payment receipt for that amount.