The secure trade holds an important place both for buyers and sellers in commercial relationships. Buyers want to receive their products under the circumstances that they agreed. Sellers want to receive the payment in the method that they agreed. Especially in international trade, both the exporter company and the importer company would like to feel guaranteed. There are different payment methods available in foreign trade that each one has different features. The payment method that the importer and the exporter will prefer is specified in the contract.
Each payment method used in foreign trade has its own different risks. The exporter and importer sides discuss and choose the best option by evaluating these risks of the payment methods. To evaluate the risks before deciding the payment method provides not to face any extra problems during or after the purchase.
You may see below the most commonly used payment methods in foreign trade.
Cash Payment / Advance Payment / Prepayment / Cash Before Delivery
With cash-in-advance payment, an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. In this payment method, all the risks are taken by the importer due to the risks such as the delay of shipment, claims of discordant goods.
Cash Against Goods
Cash Against Goods is the payment of the goods purchased by the importer after the goods arrive at the destination indicated on the sales contract and received after receipt. In this form of payment, after the exporter has forwarded the goods to the buyer, the documents representing the goods shall be sent by the importer through the bank either directly or free of charge. The exporter is confronted with the risk that the importer will not pay the cost of goods. This form of payment could only be implemented with a highly trusted client.
Cash Against Documents / Documentary Collections
Cash Against Document is a process in which a seller instructs their bank to forward documents related to the export of goods to a buyer’s bank with a request to present these documents to the buyer for payment.
This is the payment method where the importer, after receiving the goods, makes the payment at the policy/bond maturity date, agreed upon with the exporter.
Acceptance Letter of Credit: Unlike a normal L/C, this type of documentary credit does not promise to pay the beneficiary immediately upon presentation of the customary documents, but has the additional requirement of a time or term draft drawn on a named bank.
Documents Against Acceptance Credit: Export against a document with acceptance credit is an export method in which the exporting company ships the goods and then collects the payment on a date it agrees with the importer and specifies on the policy.
Goods Against Acceptance Credit: This type of payment is regulated by a bill of exchange. If the importer’s bank avalizes the bill of exchange on behalf of the importer, then, the payment of the bill of exchange is guaranteed by the bank by means of a liability imposed upon the bank as per its aval.
Letter of Credit
A letter of credit is a conditional bank guarantee that provides a payment guarantee to the exporter upon the fulfillment of obligations in accordance with the specified terms. In a letter of credit, the importer’s bank acts as an intermediary between the importer and the exporter and guarantees, on behalf of the importer, that payment will be made to the exporter -once certain conditions are fulfilled.
Since the importer and the exporter are under the guarantee of a bank, letter of credit payment method is advantageous for both parties.
A Bank Payment Obligation (BPO) is an irrevocable and independent undertaking of an Obligor Bank (the bank of the buyer/importer) to pay a specified amount to a Recipient Bank (the bank of the seller/exporter) after a successful electronic matching of pre-agreed data sets (or acceptance of any mismatches) according to an industry-wide set of rules issued by the International Chamber of Commerce (ICC), the Uniform Rules for Bank Payment Obligations (URBPO). This is a new type of payment method which combines the letter of credit and cash against goods payment methods together.