The Determination Of Payment Conditions For A Regular Transaction Is Part Of The Negotiations Between Exporter & Buyer. Common Methods Of Payment Include.
To Succeed In Today’s Global Marketplace And Win Sales Against Foreign Competitors, Exporters Must Offer Their Customers Attractive Sales Terms Supported By Appropriate Payment Methods. Because Getting Paid In Full And On Time Is The Ultimate Goal For Each Export Sale, An Appropriate Payment Method Must Be Chosen Carefully To Minimize The Payment Risk While Also Accommodating The Needs Of The Buyer.
As Shown In Figure C) – A),B),C), There Are Four Primary Methods Of Payment For International Transactions. During Or Before Contract Negotiations, You Should Consider Which Method In The Figure Is Mutually Desire Able For Both You And Your Customer.
Advance Payment (Ap) :
With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. In this method of payment the buyer remits money to the seller (exporter) before the goods are shipped, generally with the order.
However, requiring payment in advance is the least attractive option for the buyer, because it creates cash-flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms.
Letters Commonly used when bath parties know each other well. The process is fast and reliable ; depending on the credit worthiness’ of the importer. Transactions are carried out through Telegraphic Transfer ( T.T) Mail Transfer , Bank Draft, Bank Guarantee Cheque or International Money Order.
Letter Of Credit (Lc) :
This is often used in the beginning of a business relationship when importer and exporter do not yet know each other well. Letters of credit (LCs) are one of the most secure instruments available to international traders. An 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 pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. An LC also protects the buyer because no payment obligation arises until the goods have been shipped or delivered as promised.
Bill Of Exchange :
Documents against payment (D/P terms) sight bill
Also known as cash against document (CAD). The importer takes possession of the goods only after payment. Although this method is not very popular, it is very safe.
After the shipment, documents are delivered to the importer’s bank (collecting bank) with clear instructions through the sellers bank (remitting bank). According to the instructions given by the remitting bank the importer’s bank (collecting 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
Since it does not guarantee that the bill will be paid, is less secure than the D/P.
All shipping document 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 term bill and the payment is obtained on the due date.
The Most Popular Method Of Payment, For New Exporters Is O Make Use Of An Irrevocable Letter Of Credit And Later On Documents Against Payments (D/P). Once Trading Relationship Are Established Advance Payments May Be Easier To Handle.
Good May Be Delivered On A Number Of Different Terms. The Most Commonly Use Terms Are;
- Fob (Free On Board)
The Importer Arranges For Transportation And Insurance. Fob Must Specify The Part Of Departure
- C & F Or Cfr (Cost & Freight)
The Exporter Pays The Freight, The Importer Arranges The Insurance.
- Cif (Cost, Insurance & Freight)
The Exporter Pays The Freight And The Insurance.