Section II - Payment
Methods of Payment
The importer will likely want to secure the most favourable sales terms at the lowest purchase price. The exporter, however, must weigh the risk of credit losses against the need to offer competitive terms. For this reason, an important determinant of the payment method that you choose will be the level of risk associated with the transaction, as it is perceived by both parties.
When a company buys or sells products in foreign markets, it can use any one, or a combination of, four methods to obtain payment.
- Advance payment
- Open account trading
- Foreign collection
- Documentary letters of credit
An exporter receives payment before shipping goods or performing a service. Alternatively, an exporter may request a percentage of the sale in advance, with the balance settled using another payment method.
why use it: Customer risk, when the buyer is not known to the seller.
Open Account Trading
An importer receives the goods or services before being required to make a payment. 30, 60, or 90 day terms are common.
why use it: Established trading relationship between the buyer and seller.
Through its own bank, the exporter instructs the overseas bank to obtain payment from the importer in exchange for agreed-upon documents.
why use it: If there is a document of title, a collection provides some constructive control for the seller. For the buyer, there is evidence that the goods have been shipped before payment.
Documentary Letter of Credit
Issued by a bank on behalf of an importer, a letter of credit guarantees an exporter payment for goods or services, provided the terms of the credits are met.
why use it: Where there is customer credit risk or country political risk, it provides assurance for the seller as well as the buyer. Some governments insist on the use of an LC to pay for imported goods as a way to control foreign exchange.