Cash in Advance | Payment Terms in International Trade
What is Cash in Advance (CIA)?
Cash in advance, also called cash with order or advance payment, is exporters’ favourite payment term as it requires the importers to pay for the goods upfront, generally upon confirmation of the proforma invoice. Depending on the agreed terms, It may not be full payment of the total amount but a certain sum and the balance could be paid when the goods are ready for shipment.
This is the safest payment term for exporters, but it may cause the customer to choose another seller that offers more flexible payment terms. At the end of the day, nobody wants to take all the risk and wait for the goods to come safe and sound and the ones that are actually ordered. In such cases, the importer doesn’t know for sure that the quantity, content, quality, packaging, marking etc. are what the parties agreed on the sales contract until they are delivered to the importer. Even worse, delivery of the goods may never happen.
If the goods are not exactly what or how the customer ordered and there is no contract of sale, then the importer has nothing to do but wish the exporter compensate for its fault.
Due to such kind of possible problems, no buyer is willing to accept cash in advance.
While buyers naturally want to delay the payment as much as possible, sellers, on the other hand, have the same hesitation as buyers. They have the risks of cancellation of the order, non-payment after delivery, arbitrarily delay of payment, buyer’s going out of business and the like.
Whatever the reason for failure of the transaction is, it ends up with dissatisfaction of both parties which affects their business in a negative way. To avoid such undesired cases, buyer and seller have to come up with an agreement that protects both and makes the business run smoothly.
What situations make CIA workable?
In spite of the risks on the importer’s side, cash in advance may be accepted due to the following reasons.
On the importer’s side;
- The product of the exporter is in demand because of its unique function, design, quality or very competitive price.
- The product doesn’t have enough manufacturers.
- The exporter’s credit score is satisfactory and it’s a well-known company around the world.
- Attractive discount rate applied in advance purchases.
On the exporter’s side;
- The importer is a new customer and there is no information about it’s business history. So the exporter wants to protect itself from non-payment.
- The importer’s credit score is unverifiable and doubtful
- The exporter knows that the importer has to buy its products.
- The importer’s country is too risky for various reasons to send the goods without being paid full.
- The exporter is short of funds.