Methods of Payment in International Trade
There are five primary methods of payment for international trade transactions. You should consider the method which is mutually desirable for you and your customer. In this regard you can identify suitable payment option by recognizing the risks and advantages of various payment options.
- Cash in Advance
- Letter of Credit
- Documentary collection
- Open account
The Cash in Advance or Advance Payment method allows the buyer to pay cash in advance to the seller prior to shipment of goods. Paying in advance gives the greatest protection for the seller and puts the risk on the buyer. Read more >>
Letter of Credit (LC) is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer establishes credit and pays his or her bank to render this service.
It is a written undertaking by bank (Issuing Bank) on behalf of the importer (Buyer), promising to pay the exporter (Seller) up to a stated sum of money, provided that the exporter conforms to the product specifications and document requirements of the importer. Read more >>
Documentary Collection (D/C) is a trade transaction in which payment is received from the importer and remitted to the exporter through the banks involved in the collection in exchange for the draft (bill of exchange) and other documents.
Documentary Collection involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The draft gives instructions that specify the documents required for the transfer of title to the goods.
The draft is an unconditional order to make a payment in accordance with certain terms. Read more >>
An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30, 60 or 90 days. Obviously, this is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter. Read more >>
Consignment in international trade is a variation of open account in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold.