Whether you're a supplier or a buyer, it's essential that when an electronic payment is made it reaches its destination in a timely manner.

Consumer transactions are relatively simple, often involving a single credit card payment that uses one of the major forms of plastic. This is often not the case when making B2B purchases, especially when trade goes beyond national boundaries.

There are numerous ways to handle buying and selling between businesses, with some methods putting either the seller or buyer at risk and others allowing both to share risk equally.

There are five basic types of popular payment methods presently available to companies buying from and selling to other companies. Let's consider each one in terms of risk, benefit, and mechanism.

Telegraphic Transfer (T/T):

With T/T the buyer assumes 100-percent of the risk. Before any product is shipped, payment is made to and received by the seller.

Typically, the transfer takes from 3 to 4 days. For businesses that are just establishing a relationship, the T/T may be used when samples or a small shipment are involved, thus lowering the risk to the buyer.

Companies that have developed a common connection and shared trust, and through that mutual relationship negated the risk factor, often prefer this type of transaction, which is relatively fast and inexpensive.

Open Account:

The open account is the opposite of the T/T, with the buyer receiving their shipment first and the seller assuming all of the risk. This allows the trader who is spending the money the opportunity to inspect and approve the shipment prior to making payment.

Although only the wholesaler assumes the risk, it is a way for sellers to establish confidence in buyers, which can result in greater rewards - bigger and more frequent orders - in the future.

One manner that suppliers can reduce their fiscal jeopardy is by agreeing to ship a small percentage of the order and, once trust is established between the parties, converting to a payment system in which risk is shared equally.

Letter of Credit (L/C):

This type of payment involves a guarantee of payment made by the purchasing company's bank once documents such as freight receipts or bills of lading have been presented to their financial institution.

Also known as Documentary Credit, the L/C specifies the steps that must be taken and completed in order for a supplier to be paid, while pledging that payment will be made in a timely manner.

Usually a L/C cannot be altered unless both parties agree to the changes. This means that the seller is not at risk.

Although payment via L/C is assured in writing, the process can be slow due to the fact that proper documentation must be submitted to and approved by the financial entity. Because this entire process is based on the exchange of documents and not goods, it simultaneously protects both parties but also results in the transaction taking longer than a T/T or even an open account payment.

Escrow Account:

The escrow account, like the L/C, allows for risk top be shared equally. Purchasing products via this type of system involves the participation of a third party - an escrow agent - who holds the payment until the goods are delivered and inspected. Upon approval of the shipment, the buyer instructs the escrow agent to deliver payment to the seller.

Escrow, a legal arrangement, is most often utilised when the seller and buyer are unacquainted with one another. Both parties, who have approved of the particular escrow agent, enter into the transaction in full knowledge of the specific steps in the process.

Document Against Payment (D/P):

This type of payment, which mainly favors the buyer with some protection for the seller, is usually used in B2B export/import trades. It is a lengthy procedure involving a decent amount of paperwork for both the supplier and buyer.

When the supplier ships the product, documents, including those necessary to collect the goods, are presented to his/her bank. The bank sends the paperwork to the a financial institution in the buyer's country. The documents include information on the process by which the bank in the buyer's country may collect the payment.

The bank in the buyer's nation contacts the retailer, explaining that the paperwork necessary to receive the shipment will be provided once payment is made. With payment, the buyer is given the bills of lading and is now able to access the goods while the seller is presented with payment.

Future Methods:

The field of electronic payments is rapidly changing, with new products and ideas constantly being tested. Some companies have established an electronic network of purchase orders and invoices within their own integrated network.

Along with creating a simpler and more reliable channel for billing and payment, this type of system may help lower costs, improve efficiency and maintain company cash flow. Both buyers and sellers are developing these incorporated systems, which have the potential to protect all parties while quickly facilitating shipments and payments.

The numerous benefits of having a global, paperless network for B2B traders have not yet been realised. Once a network is established and refined, buyers and sellers alike will wonder, as they do now with the Internet, how they ever did business without it.