Methods of Payment in international Trade : Five types of export payment terms
There are several types of payment terms used in transnational trade, including import deals. These payment terms are outlined in the International Chamber of Commerce's( ICC) Incoterms rules, which give a formalized set of terms that define the liabilities of buyers and merchandisers in transnational deals. While Incoterms primarily deal with the transfer of threat and responsibility for transportation and delivery of goods, they also specify when and how payment should be made. Then are some common payment terms used in import deals
Letter of Credit (LC): A widely used method in international trade, a letter of credit is a financial instrument issued by a bank, on behalf of the buyer, guaranteeing payment to the seller once certain conditions (usually related to the shipment of goods) are met. There are different types of letters of credit, including irrevocable and confirmed LCs.
Cash in Advance (CIA): In this payment method, the buyer makes payment to the seller before the goods are shipped. While this provides security to the seller, it can be a less attractive option for the buyer due to the upfront financial commitment.
Open Account(OA): In an open account transaction, the seller ships the goods and then invoices the buyer. The buyer is expected to make payment according to the agreed-upon credit terms. This method places more risk on the seller, as they rely on the buyer's creditworthiness.
Documentary Collection (D/P and D/A): This method involves the seller instructing their bank to forward shipping and payment documents to the buyer's bank. In a D/P (Documents Against Payment) arrangement, the buyer can only obtain the documents after making payment, while in a D/A (Documents Against Acceptance) arrangement, the buyer receives the documents upon agreeing to pay at a future date.
Open Account with Export Credit Insurance: In this variation of open account terms, the seller may secure export credit insurance to mitigate the risk of non-payment by the buyer.
Consignment: Under a consignment arrangement, the seller ships goods to the buyer but retains ownership until the goods are sold. The buyer makes payment to the seller once the goods are sold.
Advance Payment Guarantee (APG): In some cases, the seller may request the buyer to provide an advance payment guarantee, which ensures that the advance payment is returned to the buyer if the seller fails to meet their obligations.
Escrow Services: An escrow service acts as a trusted intermediary, holding the buyer's payment until certain conditions are met, typically related to the delivery and condition of the goods.
Payment Against Documents (PAD): This method involves the buyer making payment upon receipt of the shipping and title documents, which are usually presented by the seller's bank through a correspondent bank.
Cash Against Delivery (CAD): In a CAD arrangement, the buyer pays for the goods upon their physical delivery.
Payment in Foreign Currency: Often, export transactions involve payment in a foreign currency to account for exchange rate differences.
The choice of payment term depends on colorful factors, including the position of trust between buyer and dealer, the nature of the goods, the fiscal stability of the parties involved, and assiduity norms. It's essential for exporters to precisely consider the payment terms they offer and negotiate terms that align with their business objects and threat forbearance.
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