International trade is an inseparable part of each country’s economy in the current scenario. The geographical boundaries are no more an issue for the import and export businesses. The buyers order bulk of products even without having any face-to-face conversation with the suppliers and the suppliers also agrees to make the deliveries in the far located countries. The development of Information and Communication Technologies(ICT) have resulted in converting the whole World into a Global Village, where the distance is not a barrier for trading. Though the International trade helps the buyers and sellers in getting new businesses from all around the World but which mode or method of payment should be used while doing the international trade, is always a debatable issue between the exporters and the importers. As the profit making is the soul motive of the buyers and the sellers, the mode and the terms of payments are very crucial to them.
Some of the safer and widely recommended and accepted modes of payment for International trades are :
Open Account Payments: Open Account is a mode of payment in which the entire products ordered by the buyers are being shipped and delivered to him by the sellers and the sellers agree to take payment after some period of the time. Mostly in Open Account payment, the money is being payed to the exporter after 30, 60 or 90 days from the day of the delivery. This mode of payment is though risky for the exporter because the importer will get control over the products even before making any payment but it help exporters in getting more and more buyers. It gives competitive advantages over other exporters. The Open account method of payment help the importer in maintaining the case flow. The importer gets the time to sell the products to the end consumers and recover money and then to pay the exporter out of the recovered money only.
Payment in Advance: In this mode of payment, the entire value of the ordered products is being paid by the buyer well-in advance. It is the best mode of payment for an exporter because he gets the value of his products even before making the delivery. Any exporter will love to accept this mode of payment. But is it a risky method for the importer as he can’t get his payment back if the exporter fails to delivery the products as described in the quotation or on documents. Advance or prepayments are usually accepted by the importers only if they need the products immediately or when the importer blindly trust an exporter with the product quality and on time delivery. Wire transfers and credit cards are usually being used for making advance payments.
Letter of Credit: The most widely recommended and happily accepted mode of payment is the Letter of Credit. The letter of credit is a document issued by the bank of the importer, where the importer’s bank act as a guarantor on the behalf of the importer and gives the exporter a surety that the importer will make the payment if the exporter will fulfill the delivery terms as mentioned in the letter of credit. Some of the points that an exporter must keep in mind while selecting LC as a medium of payment are:
- Make sure that the you will be able to delivery the products on date as mentioned in the LC.
- Finish all the negotiation with the importer before the development of the LC.
- Do not agree to any term which can lead to late or no payment.
Documentary Collection: In this mode of payment, both the buyer’s and the seller’s bank come into the picture. The exporter forward the goods through shipping without getting any payment but possesses control over the products through the shipping documents that the buyer will be needing for getting the products. After shipping the products, the exporter submits all the relevant documents including the bill of exchange, official invoice of the products and the shipping documents to his bank.The exporter’s bank then send these document to the buyer’s bank.
Once the buyer accepts the official invoice and signs the bill of exchange and make the payment in his bank, he gets the shipping document against which he can get the goods. This is known as Documents against Payment. If the buyer accepts the bill of exchange and legally agreed to make the payment on a fixed date and collect the shipping documents and clear the goods, this is known as Document against Acceptance. Here the exporter and the sellers are likely to be in less risky situations.
Consignment: Consignment terms of payment are highly acceptable by the importers. It is a moderated form of open account payment. The seller receives the payment only when the buyer sells the products to their end consumers. The buyer only receives and manage the products but the products are owned by the seller only till there are being sold to the third party. The buyer or the importer have the least risk in this method. The buyer have to pay only if the products are being sold. After a fixed date, according to the legal contract between the seller and the buyer, the buyer can make the payment or can return the unsold product to the exporter.
|Methods of Payment||Letter of Credit||Open Account||Advance Payment||Documentary Collection||Consignment|
|Buyer’s Risk||Little Risk of failing to meet the terms of LC||Highly risky as there is no payment even after delivery.||No Risk||Slightly Risky||Highly risk|
|Seller’s Risk||No Risk||No Risk as such||Highly risky as the exporter may not deliver the products as expected.||No Risk||No Risk|
|Time of Payment||After the delivery||After the delivery||Before the Delivery||After the delivery||After the product is sold to the third party.|