Methods of Payment

Date: 2015-10-07; view: 448.

There are four basic methods of payment - each providing varying degrees of security for the exporter.

Payment in advance. Clearly the best possible method of payment for the exporter is payment in advance. Cash with Order (CWO) avoids any risk on small orders with new buyers and may even be asked for before production begins However, this form of payment is extremely rare in exporting since it means that an overseas buyer is extending credit to an exporter - when the opposite procedure is the normal method of trade.

Variations of this form of payment are Cash on Delivery (COD) where small value goods are sent by Post Office parcel post and are released only after payment of the invoice plus COD charges.

Open account.An exporter receives the greatest security of payment from cash with order or from cash on delivery. At the other extreme, payment on open account offers the least security to an exporter.

A bill of exchange (which is also referred to as a draft) is legally defined as "an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person.

The bill is called a sightdraft if it is made out payable at sight, i.e. "on demand". If it is payable "at a fixed or determinable future time" it is called a term draft, because the buyer is receiving a period of credit, known as the tenor of the bill. The buyer signifies an agreement to pay on the due date by writing an acceptance across the face of the bill.

Letters of Credit. In any international trade transaction security is of prime importance to both importer and exporter. The exporter wants to ensure that payment will be made for any goods supplied, while the importer wishes to be satisfied that payment will be made only after dispatch of the goods. By using a letter of credit (also known as a documentary credit) both parties have a considerable degree of security in the commercial contract because it is honoured through the banking system.

An irrevocable letter of credit may be defined as an undertaking by an issuing bank (the importer's bank) to an exporter, through an advising bank, normally in the exporter's country, that the issuing bank will pay for the goods, provided the exporter (the beneficiary) complies precisely with all the terms and conditions of the credit.

Irrevocable credits can be either confirmed or unconfirmed, offering varying degrees of security for an exporter. An unconfirmed irrevocable credit is a commitment on the part of the issuing bank in the overseas country, whereas a confirmed irrevocable credit constitutes an undertaking on the part of the confirming bank as well as that of the issuing bank.