» Methods of Payments

In international trade lots of payment methods are available but in the normal commercial practice there are five methods of payment. These are

* Letter Of Credit (L/C)

* Open Account

* Cash in Advance

* Documents Against Payment (D/P)

* Documents Against Acceptance (D/A).

» Letter of Credit (L/C)

L/C is the letter of credit by institution of credibility. This is the best and safest method of payment in export trade. Letter of credit (L/C) is a written undertaking by a bank, given to a exporter on the instruction of the buyer. In this methods of payment, if your does not make the payment then buyer's bank will pay the complete amount. Letter of credit (L/C) is contract between importer and exporter with the guarantee of a bank. Since banks deals in paperwork, not in physical goods the export documentation specified serve as proxy to the real thing.

Types of Letter of Credit (L/C)

The Letter of Credit (L/C) can take one of the following terms.

* Revocable Letter of Credit (L/C): - If the Letter of Credit (L/C) can be cancelled or modified at any time with out consent of the exporter, it is called revocable Letter of Credit (L/C).

*Irrevocable Letter of Credit (L/C) : - If the Letter of Credit (L/C) can not be cancelled or modify with out consent of the exporter, it is called irrevocable Letter of Credit (L/C).

* Confirmed Letter of Credit (L/C) : - A Letter of Credit (L/C) called confirmed when the issuing bank's corresponding bank in the country of exporter adds its confirmation to the Letter of Credit (L/C) issued by the issuing bank. Once Letter of Credit (L/C) is confirmed the conforming bank assumes primary liability for payment to the exporter.

* Unconfirmed Letter of Credit (L/C): - If the Letter of Credit (L/C) is not confirmed by the any bank in the country of exporter then such types of Letter of Credit (L/C) is called unconfirmed Letter of Credit (L/C)..

The best form of Letter of Credit (L/C) is confirmed and irrevocable and it is the best guarantee for payment to the exporter. Letter of Credit (L/C) contains the list of documents and other terms & condition, which have to be strictly followed by the exporter to obtain the amount under Letter of Credit (L/C).

» Open Account

Although there are risks attached to open account trade in international trade but it can still afford a wide verity and advantages to both importer and exporter. Open account is expending within the European union and other part of the developed country. The disadvantage of open account is its flexibility, low cost in terms of set up & user friendliness particularly to the importer. For the exporter, it can be attractive option if the seller lacks experience in administering other methods of payments. With open account trading, as anew comer you must be concerned with effective credit control & insuring the transaction.

» Cash In Advance

It is best method of payment. It is very good for you if your buyer pay in advance. If you receive money in advance then you can run your process smoothly. In thus method of payment the buyer is at a disadvantage position having made the payment both in terms of own cash flow & risk. You have to consider whatever this is a payment method, which will build a mutually profitable long-term relationship. This method of payment is not a common method of payment in international trade.

» Documents Against Payment (D/P)

In this method of payment, the exporter ships the goods to his buyer and sends his draft (bill of exchange) with the necessary export documents through his bank. The exporter bank then sends the documents to the corresponding bank in buyer's country. The bank of importer asks the importer to pay the draft & release the documents. If the buyer pay the amount then bank handover the documents to buyer and if the buyer does not make the payment, then bank will not handover the documents to buyer and exporter will suffer loss. So it is a risky method of payment. You can cover our risk credit risk by taking credit risk policy (insurance policy).

» Documents Against Acceptance (D/A)

This is the most unsecured method of payment in export trade. In this method of payment exporter sends the documents to his buyer through his bank. The buyer's bank handover the documents to the buyer only upon acceptance imply that he agrees to pay the amount of draft (bill of exchange) after expire of the period of credit (or usance period). In his method of payment usance period is allow. The maximum usance period is for 180 days. The disadvantage of Documents Against Acceptance (D/A) terms is that its allow to buyer to take delivery of the goods before making the payment. So chose this method only when the buyer is very reliable and also cover your risk under credit risk policy (Insurance Policy).