What is Cash in Advance?

Cash in advance refers to a condition in the international trade providing that the importer must pay cash to the owner of the goods before shipping the goods.

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How Does Cash in Advance Work?

Cash in advance method of payment is used in the international trade bay the traders to minimize the problems associated with credit risks or failure to pay for the goods after shipment. This method of payment implies that when the exporter ships the goods to the importer, he is confident on the payment. It reduces the situation that the importer may fail to pay for the products thereby creating discourse to the exporter. This method is most commonly used for export/import business. However, it can also be used in other types of business other than export/import business.

Cash In Advance: How It Works

Before the importer receives a shipment of a product from a foreign trader, they are required to pay cash in advance for the products. This method of payment makes foreign producer more secured against failure on the side of the importer to pay. In some cases, this deal may be applicable when the exporter ships the goods in advance before the importer make payment, but the ownership of the good remain to exporter until the importer make payments of the goods. The payment is made through credit card or wireless service. Despite the benefits of this method to the exporter, this method is not commonly used in the international trade. This is because they create problems regarding buyer`s cashflows thus making it inconvenient means of payment. This may also have adverse effects on the exporter in the case of a competitive market since the importer will move to another exporter who does not use the method.

Terms

The terms cash in advance describes the purchase term whereby the cash is paid prior to the shipment. This minimizes the risks to the seller and increases the risks to the buyer. This type of agreement is associated with other terms such as Free on Board and constraint. The free-on-board terms-present that the importer becomes in charge of the product once they are discharged by the exporter and become liable to all risks associated with the product such as financial risks, damages of the products and any other risks. However, these risks are rare unless the product in the deal is fragile and has phenomenal value. Constraints refers to a condition that limits the efficiency and effectiveness of carrying out the business operation. For example, when a company has $ 5000 cash at hand, and an income of $3000, it is considered to have a constraint of $ 8000. This means that when the business transaction requires the use of cash in advance method, then the company can only obtain a limit of $8000