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Methods of Payment in exporting and importing. Cash in advance Letter of Credit Open account Consignment sales. Cash in advance. Payment is collected before the goods are shipped to the customer.

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Methods of Payment in exporting and importing

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methods of payment in exporting and importing
Methods of Payment in exporting and importing
  • Cash in advance
  • Letter of Credit
  • Open account
  • Consignment sales
cash in advance
Cash in advance

Payment is collected before the goods are shipped to the customer.

The main advantage is that exporter need not worry about collection problems and can access funds almost immediately upon concluding the sale. From the buyer’s standpoint, cash in advance is risky and may cause cash flow problems

cash in advance1
Cash in advance

The buyer may hesitate to pay cash in advance for fear the exporter will not follow through with shipment, particularly if the buyer does not know the exporter well.

* Cash in advance is unpopular with foerign buyers and tends to discourage sales. Exporters who insist on cash in advance tend to lose out competitors who offer more flexible payment terms.

letter of credit l c
Letter of Credit(L/C)

Because a letter of credit protects the interests of both the buyer and the seller simultaneously, it has become the most popular method for getting paid in export transactions.

Essentially, L/C is a contract between the banks of the buyer and the seller that ensures payment from the buyer to the seller upon receiving an export shipment

shipping documents trade forms
Shipping Documents(Trade Forms)

C/O = Certificate of Origin

Commercial Invoice

Packing List

Quality/Quantity Certificate

Bill of Exchange

Insurance Policy

Bill of Lading

GSPCO(Generalized System of Preference)

letter of credit
Letter of Credit

It amounts to a substitution of each bank’s name and credit for the name and credit of the buyer and the seller. An irrevocable L/C can not be cancelled without agreement of both buyer and seller.

The selling firm will be paid as long as it fulfills its part of the agreement.

letter of credit1
Letter of Credit

L/C specifies the documents the exporter is required to present, such as a bill of lading, commercial invoice, and a certificate of origin, insurance policy. Before the buyer’s bank makes a payment, the buyer’s bank verifies that all documents meet the requirements the buyer and seller agreed to the letter of credit. If not, the discrepancy must be resolved before the bank makes payment

letter of credit l c1
Letter of Credit(L/C)

1. An Exporter signs a contract for the sale of products to a foreign buyer(the applicant of credit).

2. The importer requests its bank(the importer’s bank = opening bank of L/C) to open L/C in favor of the exporter(the beneficiary of the credit)

3. The importer’s bank(L/C opening bank) notifies to the exporter’s bank(L/C advising bank)that L/C has been issued.

letter of credit2
Letter of Credit

4. The exporter’s bank confirms the validity of the letter of credit.

5. The exporter prepares and ships the products to the importer as specifies in L/C

6. The exporter presents the shipment documents to its bank, the exporter’s bank, which examines them to ensure that they fully comply with the terms of L/C. The documents include an invoice, B/L, and I/P

letter of credit3
Letter of Credit

7. The exporter’s bank sends the documents to the importer’s bank, which similarly examines them to ensure that they comply fully with L/C.

8. Upon confirmation that everything is in order, the importer’s bank makes full payment for the goods to the exporter, via the exporter’s bank.

9. The importer makes full payment to its bank (1) upon receipt of documents (2) within the time period granted to it, which can extend to several months

bill of exchange draft
Bill of Exchange (Draft)
  • The draft is a financial instrument that instructs a bank to pay a specific amount of specific currency to the bearer on demand or a future date.
  • Drafts that are paid upon presentation are called sight draft (at sight)
  • Drafts that are to be paid a a later date, often after the buyer receives the goods are called time draft (usance)
open account
Open account
  • The buyer pays the exporter at some future time the following receipt of the goods, in much the same way that a retail customer pays a department store on account for the products he or she has purchased. Because of the risk involved, exporters use this method only with customers of long standing or with excellent credit or a subsidiary owned by the exporter.
open account1
Open account
  • With an open account, the exporter simply bills the customer, who is expected to pay under agreed terms at some future time.
consignment sales
Consignment Sales
  • The exporter ships products to a foreign intermediary who then sells them on behalf of the exporter. The exporter retains title to the goods until they are sold, at which point the intermediary or foreign customer owes payment to the exporter. The disadvantage of this way is that the exporter maintains very little control over the products. Consignment sales works best when the exporters has an established relationship with a trustworthy distributor