What Is a Remittance and How Does It Work?

Table of Contents

  1. Introduction
  2. What is a Remittance?
  3. How Does a Remittance Work?
  4. Remittance Fees
  5. Difference Between Remittances and Payments
  6. How to Send a Remittance
  7. How to Receive a Remittance
  8. Pay as You Sell with Shopify Capital
  9. Remittance FAQ

Introduction

In the interconnected world of commerce, transferring money between parties is a fundamental activity. Whether it’s for paying suppliers, sending money to family overseas, or settling debts, these transfers, commonly known as remittances, play a crucial role. So, what exactly is a remittance, and how does it work? Understanding the mechanics and implications of remittances is essential for businesses and individuals alike.

A remittance involves transferring money from one party to another, and while this might sound straightforward, the processes and contexts can vary significantly. This blog post aims to shed light on the intricacies of remittance, explaining how they work, their various forms, fees involved, and why they are essential in both personal and business finances.

What is a Remittance?

A remittance is essentially a transfer of money from one party to another. Though often synonymous with payment, remittances encompass a broader range of transactions. They can be used in various contexts, from business dealings and debt repayment to personal gifts and aid.

In the ecommerce sector, retail businesses may encounter remittances when receiving payments from wholesale customers or when remitting payments to suppliers. It also includes international money transfers, such as sending funds to overseas suppliers. However, remittances are not confined to cross-border transactions; they can be domestic as well.

Businesses often receive remittance advice alongside payments, which provides details about the transaction, ensuring transparency and proper recording. This advice is particularly useful for confirming that the payment correlates with the respective invoice.

How Does a Remittance Work?

Making a Bank Transfer

One common method of remittance is through bank transfers. For instance, if a wholesaler makes a purchase from your online store, they might remit the money to your business bank account via an Automated Clearing House (ACH) transfer within the US or an international wire transfer for cross-border transactions.

In such transactions, you might receive remittance advice indicating that the payment is on its way. While not mandatory, remittance advice helps maintain clear communication between the sender and the recipient.

Repaying a Loan or Remitting Sales under a Merchant Cash Advance (MCA)

Another scenario involves using financial services, like Shopify Capital, for cash advances or loans. In this case, remittance can mean repaying the loan principal along with interest or transferring a percentage of your sales under an MCA. Shopify Capital, for example, facilitates funding and automatically deducts repayments as a percentage of your daily sales, ensuring a seamless cash flow for businesses.

Transferring Money as a Gift

International workers frequently send money to their families back home. In these cases, the remittance may occur via banks or financial institutions specializing in international money transfers. These intermediaries ensure the money reaches the recipient, often charging a fee for the service.

Remittance Fees

Fees associated with remittances depend on the method and context of the transfer. Domestic ACH transfers might incur minimal to no charges, whereas international wire transfers usually involve higher fees due to the complexity of cross-border transactions.

For example, businesses might incur sending fees from their bank (typically $15-$50) and receiving fees from the recipient’s bank, though some banks waive incoming wire transfer fees. Domestic transfers tend to be cheaper, and by using electronic fund transfers like ACH or AFT, businesses can often avoid these costs.

Difference Between Remittances and Payments

While all payments can be considered remittances, not all remittances serve as payments. This distinction is made clearer by the context in which money is transferred. For example, remittances can include gifts and aid, which are not repayments for goods or services received.

Remittance advice serves to detail the transaction, offering insights into what the payment is for. This is particularly beneficial in business transactions to ensure the remittance is properly allocated.

How to Send a Remittance

Sending a Remittance as a Business

When a business sends a remittance, it generally follows these steps:

  1. Prepare the payment information: Verify the recipient’s details, including bank account information.
  2. Initiate the transfer: Use your bank’s electronic fund transfer system or wire transfer service.
  3. Provide remittance advice: Inform the recipient about the transfer and its purpose.

Automated remittances, such as those used for repaying loans through services like Shopify Capital, are more streamlined, with repayments deducted automatically based on agreed terms.

Sending a Remittance as an Individual

Individuals sending remittances, especially as gifts or aid, might follow a slightly different procedure:

  1. Select a transfer service: Choose a bank or money transfer service.
  2. Provide necessary details: Offer the recipient’s information and the amount to be sent.
  3. Pay any applicable fees: Be aware of the transfer fees and include them in your calculation.

These steps ensure the remittance reaches its destination, whether it’s a family member overseas or a loan repayment.

How to Receive a Remittance

Receiving remittances typically requires less effort compared to sending them. In many cases, the money is deposited directly into your account. For cash pickups, recipients must visit the designated location and present identification to collect the funds.

Pay as You Sell with Shopify Capital

In business contexts, remittances facilitate not only payments but also operational funding. Shopify Capital offers an efficient method for businesses to obtain necessary funding and remit repayments based on sales performance. By enabling automatic repayments through a percentage of daily sales, Shopify Capital supports businesses in maintaining liquidity without the burden of fixed repayment schedules.

Remittance FAQ

What is an example of a remittance transfer?

A common example is a wholesaler sending payment to an online retailer via an ACH transfer or international wire transfer.

Why do people send remittances?

Remittances are sent for various reasons, including paying for goods or services, repaying loans, and offering financial support to family members.

How do you remit cash?

Cash can be remitted through banks, money transfer services, and specialized agents, depending on the sender’s and receiver’s locations and preferences.

Is a remittance proof of payment?

While a remittance indicates a transfer of money, remittance advice provides details such as purpose and transaction information, which can act as proof of payment.

Overall, understanding remittances is vital for managing personal and business finances efficiently. By mastering the nuances of remittance transfers, you can ensure smooth financial operations and clarity in your transactional communications.

Explore Shopify Capital for streamlined funding options, enabling your business to thrive with flexible repayment solutions.


Sign up for Shopify today and leverage this knowledge to optimize your financial transactions for better business performance.

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