Business interactions involve goods and services that are paid for in various ways. The two main payment methods are cash-in-advance payment and buyer-backed purchase order financing (BPOF). Cash-in-advance financing method terms allow an exporter to avoid the risk of default since payment is made before the items are transferred to the customer’s possession (Omopariola et al., 2021). Cash-in-advance options offered to exporters for foreign sales include electronic payments and credit cards, which are the most regularly used payment methods. Using escrow solutions for business e-commerce transactions is becoming more common as the Internet grows popular. However, Omopariola et al. (2021) show that asking for upfront payment is the least appealing choice for the customer because it results in an unattractive cash flow issue for the seller. Foreign customers are also worried that the items may not be delivered if payment is made in advance.
Consequently, exporters that rely on cash-in-advance means of payment as their only mode of conducting business may find themselves at a competitive disadvantage against competitors offering more favorable payment terms. As global interactions and competition increase, exporters have now relied on buyer-backed purchase order financing (BPOF) as the better payment option (Huang et al., 2018). This method gives the buyer a partial or complete assurance to share the lender’s financing risk, making the SME’s loan application more straightforward and expedient. In general, a reasonable buyer’s guarantee should be favorably related to their product margins and the dependability of their suppliers’ supply chain to strike a balance between the risks and benefits associated with BPOF (Huang et al., 2018). Many exporters favor the BPOF method because it minimizes risks and promotes buyer-supplier trust and commitment, fostering long-term relationships.
References
Huang, B., Wu, A., & Chiang, D. (2018). Supporting small suppliers through buyer-backed purchase order financing. International Journal of Production Research, 56(18), 6066-6089. Web.
Omopariola, E., Windapo, A., Edwards, D., & Chileshe, N. (2021). Attributes and impact of advance payment system on cash flow, project, and organizational performance. Journal of Financial Management of Property and Construction, (ahead-of-print). Web.