Payment Terms In International Trade

In today’s global marketplace, it is more important than ever for exporters because it can offer their customers attractive sales terms supported by the proper payment methods. Do you know? It can win sales against International trade presents a spectrum of risk, which causes uncertainty over the timing of payments between the exporter and importer. Would you like to know more about terms of payments? This article helps you to know about valuable information of mode of payment in international trade.

The most common methods of payment for the export of goods are:

• Cash- in- Advance

• Letters of Credit (L/C)

• Documentary Collection

• Documents against payment (D/P terms) sight bill

• Documents against acceptance (D/A terms) term bill

• Open Accounts

 

➢ Cash- in- Advance - With cash in advance, the exporter can avoid credit risk, the buyer remits money to the seller before the goods are shipped. Requiring payment in advance is the least attractive option for the buyer. Foreign buyers are concerned that the goods may not be sent if payment is made in advance

 

➢ Letters of Credit (L/C) - Letters of credit (LCs) are one of the most secure instruments available to international traders. It 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 pays his or her bank to render this service. It is useful when reliable credit information about a foreign buyer is difficult to obtain and protects the buyer.

➢ Documentary Collection -It is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight or on a specified date. 

 

➢ Documents against payment (D/P terms) sight bill - After the shipment, documents are delivered to the importer’s bank with clear instructions through the sellers’ bank. According to the instructions given by the remitting bank the importer’s bank releases all shipping documents to the buyer only after payment. Then the importers’ bank remits money to the seller’s bank. 

 

➢ Documents against acceptance (D/A terms) term bill - All shipping documents along with a bill of exchange (term bill) are delivered to the importer’s bank with clear instructions through the sellers’ bank. According to the instructions given by the seller’s bank the importer’s bank releases documents to the buyer only after acceptance of the term bill and the payment is obtained on the due date. 

 

➢ Open Accounts- An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. This option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. The exporter can offer competitive open account terms while mitigating the risk of non-payment by using one or more of the trade finance techniques.

 

To become successful in today’s global marketplace, customers should be provided by exporters with appealing sales terms supported by suitable payment methods. Actually, there is no one payment option that is appropriate for all situations. Each payment option has its pros and cons so you should choose carefully. Therefore, you can take a step in choosing the right one to monitor a customer’s ability to pay and any factors that might influence that ability.

Penned By Jesmi Silva