It’s important for all types of businesses to know what remittances are and how they work. That’s because remittance is likely to come up at some point in regards to getting paid or moving money from one party to another.
In some cases, a remittance refers to international money transfers, but it can also be used in domestic contexts, such as when one business pays another. In this guide, we’ll break down what a remittance is, how it works, and the most important things to know about sending and receiving remittances.
What is a remittance?
In simple terms, a remittance is the transfer of money from one party to another. Sometimes a remittance is synonymous with “payment,” but a remittance does not strictly have to be a payment. It can also involve transferring money as a gift, aid, or essentially any other context where one person or organization wants to move money to another individual or entity.
For ecommerce retailers, you might come across a remittance in the context of another business sending you payment for their order, or you might remit money yourself to other businesses, such as when paying suppliers.
A remittance also sometimes refers to international wire transfers, such as if you’re sending money to an overseas supplier for an order. But the term does not have to always apply to overseas transactions. A local customer, for example, might send you a remittance via a domestic wire transfer or other forms of electronic funds transfers.
Remittances can also involve repaying loans or remitting a percentage of your sales under a merchant cash advance. For example, Shopify Capital provides eligible merchants access to offers for funding based on several factors including your sales history within Shopify and your engagement with the Shopify platform. If approved, you receive funding in as quick as two days and automatically make payments as a percentage of your daily sales*.
How does a remittance work?
A remittance works by sending money from one party to another, typically through the use of a financial intermediary like a bank. A remittance could involve situations like:
Making a bank transfer
Here’s one example: Let’s say a wholesaler purchases from your online store and sends money to your business bank account via ACH transfer in the US, or via an international wire transfer if purchasing from another country.
In these contexts, you might receive remittance advice, which is simply a notification that payment is on its way or has been made for a particular invoice. While not always required, some businesses regularly use remittance advice to inform others that a remittance—i.e., the money transfer—is on its way.
Repaying a loan or Remitting Sales under a Merchant Cash Advance (MCA)
Another situation involves using a financial service (like Shopify Capital) to receive funding under a cash advance or loan.
For a loan, a remittance involves repaying the loan principal plus interest. For an MCA, which is a purchase of future sales, the remittance is the transfer of the percentage of sales agreed upon.
For example, if Shopify Capital gives you access to a cash advance of 5,000 USD for 5,650 USD paid from your store’s future sales, with a remittance rate of 10%.
The 5,000 USD amount that you receive is transferred to your business bank account, and Shopify Capital receives 10% of your store’s daily sales until the full 5,650 USD total to remit has been remitted.
Transferring money to others as a gift
For example, some international workers send aid back to family members overseas. In that case, they might use a bank or another type of financial institution equipped to remit—i.e. send—that money abroad, such as via an international wire transfer.
The intermediary that sends money to the other party might be licensed as a sending agent or remittance transfer provider, depending on the rules in your country and how you choose to send the money.
Remittance fees
A remittance does not always involve fees, but it depends on the context and how you send or receive funds. For example, a remittance could be a simple ACH transfer in the US or an Automated Funds Transfer (AFT) in Canada, such as when a business pays a supplier. Doing so in this format usually does not carry a fee.
Sending a remittance as a wire transfer, however, often carries transaction costs, but this varies widely depending on the situation. For example, if a business sends a remittance in the context of an international wire transfer, like a UK business paying a supplier in the US via the SWIFT network, then there could be fees charged by both the bank that sends the money—i.e. the payer’s bank—and the bank that receives the money—i.e., the recipient’s bank.
The exact fees for remittances that are international wire transfers vary, but usually, the sending bank charges around $15-$50. Receiving bank fees can be similar, though it’s not uncommon to find banks that do not charge fees for incoming wire transfers, just outgoing ones.
Domestic wire transfers can also carry fees, but these generally are a bit less than international wire transfer fees. Also, if the transaction involves an intermediary that connects the two financial institutions sending and receiving the remittance, that could be another fee of roughly $15-30.
Other potential types of remittance transaction costs to consider include:
- Currency conversion fees: If sending or receiving a remittance that transfers funds from one currency to another, you could lose a little bit of money based on the parties involved not providing optimal exchange rates. Or, money transfer operators might charge a small percentage of the overall transaction amount to remit money from one currency to another.
- Account funding fees: Some remittance services charge a fee, such as a small percentage of the amount you fund your account with, to send money to other entities. This fee could be separate from transfer fees.
- Account withdrawal fees: Aside from transfer fees for receiving money, some financial institutions or other intermediaries might charge recipients a small fee to withdraw funds, such as if they’re using a debit card linked to a bank or credit union account that receives remittances.
Altogether, remittance fees add up to an average of 6.2% of the total amount sent, according to The World Bank. However, this applies more to individuals remitting money abroad. In the context of business remittance flows, fees can be much smaller, and you might even be able to avoid remittance fees, such as by making certain types of electronic fund transfers like ACH or AFT remittances where possible.
Difference between remittances and payments
All payments are remittances, but not all remittances are payments. No, this is not a riddle. Think of it like this:
- A payment is the transfer of money from one party to another to complete a purchase or a debt obligation. For example, a customer might make a payment by credit card or bank transfer when checking out on your ecommerce website.
- A remittance is also the transfer of money from one party to another—which is why all payments are remittances—but the key difference is that a remittance does not have to be tied to a purchase or loan. Remittance is the broader category of money transfers, such as how some remittances involve sending money overseas as a gift to family members. In that case, you’re not really making a payment, since you don’t owe anything. You’re just sending money, i.e. a remittance.
Also, the term remittance is often used in conjunction with remittance advice. Remittance advice is just a notice about a payment, such as how a business might receive a remittance advice letter enclosed with a check from a wholesale customer. The check is the payment method, and the remittance advice letter specifies which purchase order or invoice the check applies to.
In the view of Verena Street co-founder Eric Gantz’s view, “Payment feels more like the final act of settling a debt, while remittance emphasizes more the action of sending money itself.”
How to send a remittance
Figuring out how to send a remittance depends on the context, because businesses sending remittances can be different than when individuals send remittances, particularly when gifting money overseas.
Sending a remittance as a business
For business purchases, sending a remittance typically requires:
- Figuring out which payment methods the business accepts, such as by looking at the available options on an ecommerce site’s checkout page or asking the merchant if dealing with an offline transaction.
- Using your preferred payment method that the business accepts, such as by inputting your credit card information on a checkout page.
- Sending a remittance advice letter if either party requires that, such as if your company has a policy of sending an electronic remittance advice to suppliers to let them know that a payment for a specific purchase order is on its way via electronic funds transfer.
Sometimes, sending a remittance is automatic based on your authorization to automatically debit your bank account, such as how Shopify Capital remittances are automatically debited from your business bank account to repay your capital loan or cash advance based on your store’s daily sales.
Sending a remittance as an individual
For individuals, sending a remittance such as to make a purchase or pay back a loan can be similar to the process businesses follow. But sending a remittance in terms of gifting money to another person, such as migrant workers sending money abroad to family in developing countries, often involves other steps such as:
- Finding a money transfer service: Your bank might be positioned to send money overseas, so you could ask them what their transfer process looks like. But sometimes you need or want to use another type of service that makes it easier to remit money abroad, such as if you or the recipient doesn’t have a traditional bank account.
- Entering the recipient’s information: To complete the remittance, you need to enter the recipient’s information, such as their name and account number if applicable, or how and where you want them to receive the remittance, such as if they’re picking up cash.
- Funding the remittance: To complete the remittance, you need to fund it. Depending on the provider, you might be able to use funding sources like a credit card or cash, or you might conduct a bank transfer. The fees can vary based on how you fund the remittance.
How to receive a remittance
Receiving a remittance is often more straightforward than sending one. In many cases, the remittance shows up in your account without requiring extra work on your part, such as if the other party—whether that’s a business or individual—makes an electronic funds transfer.
However, not all remittances involve bank transfers or other forms of payments where the money just shows up in your account. Particularly for individuals, the process can sometimes require a few extra steps.
For example, if someone receives a remittance that involves picking up cash, they must go to the location where the recipient sent the cash and provide their ID to complete the transaction.
Pay as you sell with Shopify Capital
Overall, a remittance is all about getting money from Point A to Point B. In some contexts, it’s the same thing as a payment, but it can also be a transfer of funds for other purposes, like gifts or international aid.
Sometimes a payment comes along with a remittance advice, which specifies what the payment is for, though not all companies follow this practice. A remittance can also be an automatic payment, such as how repayments of a Shopify Capital loan or cash advance get remitted based on a percent of your store’s daily sales**.
While this may all sound a little more technical than what you encounter on a daily basis, understanding financial terms like remittance can help you better grasp what’s happening if you are eligible to apply for financing through Shopify Capital or when you receive a remittance from a wholesale customer.
Remittance FAQ
What is an example of a remittance transfer?
An example of a remittance transfer is a business sending money via a bank transfer to a supplier, such as if a grocery store sends a remittance to a beverage company using an electronic funds transfer.
Why do people send remittances?
People send remittance transfers for several reasons, such as to pay for goods and services, settle a debt, or gift money to friends and family. Businesses often use remittances to pay for purchases. Individuals also often use remittance to send gifts or aid. For example, migrant remittances could be used by international workers to send money back to family members in other countries. According to the International Monetary Fund, remittances provide a more even distribution of money to developing countries compared to other methods such as foreign direct investment.
How do you remit cash?
You can remit cash through certain intermediaries, such as certain money transfer services like Western Union or MoneyGram. These transfer services can enable you to pay in cash and/or have your recipient pick up the remittance as cash, such as if you specify that the recipient should pick up the cash at an eligible location that partners with a transfer service. Just be sure you’re using a reputable transfer service, especially if you’re paying in cash, and be aware of any transaction costs.
Is a remittance proof of payment?
A remittance itself is not a proof of payment. Instead, a remittance is the transfer of funds from one party to another. However, a remittance advice is a proof of payment, as a remittance advice provides notice that a specific payment has been made or is in the process of being made, such as with a pending bank transfer.
*Funding may be in the form of a merchant cash advance or loan depending on the region.
**Shopify Capital loans must be paid in full within 18 months, and two minimum payments apply within the first two 6 month periods. Shopify Capital loans must be paid in full within 18 months, and two minimum payments apply within the first two 6 month periods.
This article is focused on industry standards and descriptions are not specific to Shopify’s financial suite of products. To understand the features of Shopify’s lending products, please visit shopify.com/lending.
Available in select countries. Offers to apply do not guarantee financing. All financing through Shopify Lending, including Shopify Capital, is issued by WebBank in the United States.
