Method Of Payment

Payment Methods for International Trade

Parties to the international transaction normally negotiate a method of payment based on the exporter’s of the importer’s credtiworthtiness and the norms of their industry. Many forms of payment have evolved over the centuries, including payment in advance, open account, documentary collection, letters of credit, credit cards, and countertrade. As with most aspects of finance, each form involves different degrees of risk and cost.

METHOD	TIMING OF PAYMENT	TIMING OF DELIVERY OF GOODS	RISK FOR EXPORTER	RISK FOR IMPORTER	AVAILABILITY OF FINANCING FOR EXPORTER	CONDITION FAVORING USE
Payment in advance	Prior to delivery of goods	After payment, when goods arrive in importer’s country	None	Exporter may fail to deliver goods	N/A	Exporter has strong bargaining power importer unknown to exporter
Open Account	According to credit terms offered by exporter	When goods arrive in importer’s country	Importer may fail to pay account balance	None	Yes, by factoring of accounts receive able	Exporter has complete trust in importer; exporter and importer are part of the same corporate family
Documentary collection	At delivery if sight drat is used; at specified later time if time draft is used	Upon payment if sight draft is used; upon acceptance if time draft is used	Importer may default or fail to accept draft	None	Yes, by discounting draft from its face value	Exporter trusts importer to pay as specified; when risk of default is low
Letter of credit	After terms of letter are fulfilled	According to terms of sales contract and letter of credit	Issuing bank may default; document may not be prepared correctly	Exporter may honor terms of letter of credit but not terms of sales contract	Yes, by discounting letter from its face value	Exporter lacks knowledge of importer; importer has good credit with local bank
Credit card	According to normal credit card company procedures	When goods arrive in importer’s country	None	Exporter fails to deliver goods	N/A	Transaction size is small
Countertrade	When exporter sells countertraded goods	When goods arrive in importer’s country	Exporter may not be able to sell countertraded goods	None	No	Importer lacks convertible currency; importer or exporter wants access to foreign distribution network