Methods of payment

10-1 Excel BooksExport and Import Management Aseem Kumar

Copyright © 2007, Aseem Kumar

Methods of Payment

Chapter

10Methods of Payment



Methods of Payment

The following methods of payment are available for export:

1. Advance Payment

It is the safest payment option where the importer sends the payment in advance

to the exporter either through TT (Telegraphic Transfer) or through a cheque or

demand draft. This is normally done after acceptance of the order by the exporter.



Methods of Payment

2. Open Account

This is an arrangement between the buyer and the exporter where goods are

shipped without the guarantee of payments. Both the parties agree on sales

terms but no documentary evidence is created. The odds are heavily loaded in

the favour of the importer as the payment will be released at a later date. The

accounts between the exporter and buyer are settled periodically. Chances of

default or delay in payment are very high under this system. The exporter must

deal with only trustworthy buyers under this scheme.



Methods of Payment

3. Consignment Sales

Under this method, goods are shipped by the exporter but he transfers the

ownership to the importer only when the goods are actually sold. This means that

the entire risk here is borne by the exporter. If the importer is unable to find an

actual buyer, the exporter is stuck with the unsold goods and he can not claim

payment for the same from the importer.



Methods of Payment

4. Documents against Acceptance (D/A)

This system is based on documents and thus falls under the category of

documentary credit. The exporter does not want to part with the ownership of

goods unless he is certain about the receipt of payment of the same. The

importer, on the other land, does not want to pay, unless he is sure about the

receipt of goods. Banks function as intermediaries, providing assurance to both

the parties on the other's behalf and use documents as a tool for this assurance.

Under the D/A method, the exporter sends the shipment documents along with

the draft (bill of exchange) through his bank to the importer's bank that gets the

draft accepted by the importer before handing him over the title documents.



Methods of Payment

5. Documents against Payment (D/P)

Like in D/A arrangement, here too the documents are sent to the buyer's bank

with a draft (bill of exchange). However, this draft is a sight draft and not a

usance draft. This draft has to be paid immediately on sight and only after the

receipt of payment the shipment title documents are released. It means that the

importer gets possession of the ownership documents of the shipment only after

making payment for the same. The exporter, on the other hand, releases

possession of shipment title papers only against the receipt of payment. No

credit is involved here.



Methods of Payment

6. Letter of Credit (LC)

A letter of credit is a very popular form of documentary credit. In fact, majority of

international business transactions use LCs. The letter of credit is a letter

established by the importer through his bank to the benefit of the exporter

promising payment of drafts drawn against this letter if the exporter complies with

the specific conditions prescribed in the LC. The conditions are usually the same

as stipulated in the purchase order or export contract. LC acts as a substitution

of the importer's promise to that of his bank's to the exporter to honour its

commitment to pay for the export bills provided all conditions are satisfied. In this

way, a letter of credit works as an independent contract between the exporter

(designated beneficiary) and the issuing bank.



Methods of Payment

7. Benefits of LCs

To Exporters

LC minimizes the credit risk provided the issuing bank is reputed and carries

a sound track record.

LC eliminates risk of payment delays due to uncertain factors like political

instability.

LC affords financing for the exporter.

The exporter is bound to ship by a certain date as per the LC, failing which

the order will stand cancelled.

LC minimizes uncertainty and provides a clear picture to the exporter

regarding all the requirements for payments.

Cont….



Methods of Payment

To Importers

He is in a position to ask for better prices and faster deliveries.

Use of LCs will attract a large number of good suppliers offering the importer

a lot of choice.

The importer is assured of timely shipment of the specified quality and

quantity of ordered merchandise.

The importer can refuse payment if he finds any and even a very minor

mistake/oversight in any of the required documents.

Importer's risk of losing money in case the supplier is unable or unwilling to

effect a proper shipment is totally eliminated.



Methods of Payment

8. Types of LCs

9. Documentary and Clean LCs

10. Revocable and Irrevocable LCs

11. Confirmed and Unconfirmed LCs



Methods of Payment

9. Special LCs

10. Revolving LCs

11. Transferable LCs

12. Back-to-Back LCs



Methods of Payment

Useful Tips to Exporters regarding LCs

Always go for an irrevocable, confirmed LC issued by a prime bank.

Ensure that the LC is transferable and allows transshipments.

Before the LC is actually opened, please ask the importer to fax you a draft.

The exporter must also show this draft to his banker and the C&F agent to

make sure that no unusual conditions are present and that everything is in

order.

This exercise is important because any change in an LC (known as

Amendment) once it is established, is very difficult to make and carries high

bank charges at the buyer's end.

Business

Methods of payment