REPORT ON

INTERNATINAL TRANSACTION METHODS

COURSE TITLE: INTERNATIONAL BUSINESS

Submitted To:
Ma’am Rukhshinda Begum
Presented By GROUP NO 01
Anum Nasir (P19551008) Atiya Habib (P19551011)
Aysha Khalid(P19551012) Fatima Saleem(P19551027)
Laraib Aslam (P19551041)

In partial fulfillment of the requirements for the Degree of Masters in Commerce

Department of Commerce
Faculty of Management and Administrative Sciences
University of Karachi
Karachi, Pakistan
MARCH 31, 2021
 CONTENTS
ACKNOWLEDGEMENT..............................................................................................................................................5
SUMMARY....................................................................................................................................................................6
INTERNATIONAL TRANSACTION METHODS......................................................................................................7
DOCUMENTARY COLLECTION...............................................................................................................................7
Parties Involved In the Documentary Collection....................................................................................................7
PROCEDURE OF DOCUMENTARY COLLECTION........................................................................................7
Steps Involved In the Process oF Documentary Collection....................................................................................8
TYPES OF DOCUMENTARY COLLECTIONS......................................................................................................8
1 Documents Against Payment...............................................................................................................................9
2 Documents Against Acceptance..........................................................................................................................9
ADVANTAGES OF A DOCUMENTARY COLLECTION.....................................................................................9
DISADVANTAGES OF DOCUMENTARY COLLECTION..................................................................................9
Risks Associated with Documentary Collection.........................................................................................................9
USED OF DOCUMENTARY COLLECTION..........................................................................................................9
In which countries it is applicable?.............................................................................................................................9
LETTER OF CREDIT..................................................................................................................................................10
Entities of a Letter of Credit.....................................................................................................................................10
MECHANISM/PROCESS OF LETTER OF CREDIT............................................................................................10
Sales contract........................................................................................................................................................11
Request for LC......................................................................................................................................................11
Issuance of LC......................................................................................................................................................11
Deliver letter of credit to the seller.......................................................................................................................11
Shipments of Goods..............................................................................................................................................12
Present Documents to the Advising Bank............................................................................................................12
Send the Documents to the Issuing Bank.............................................................................................................12
Verification of Documents and Claim For Payments...........................................................................................12
Transfer the Documents to the Buyer...................................................................................................................12
Transfer Payment to Advising Bank.....................................................................................................................12
Payment to the Seller............................................................................................................................................12
TYPES OF LETTER OF CREDIT...........................................................................................................................12
Irrevocable/ Revocable Letter of Credit...............................................................................................................12
Stand-by Letter of credit ......................................................................................................................................13

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 Confirmed Letter of credit ...................................................................................................................................13
Unconfirmed Letter of credit ...............................................................................................................................13
Transferable Letter of credit ................................................................................................................................13
Back-to-Back Letter of credit...............................................................................................................................13
Payment at Sight Letter of Credit.........................................................................................................................13
Deferred Payment Letter of Credit.......................................................................................................................13
Red Clause Letter of Credit..................................................................................................................................14
Advantages of Letters of Credit................................................................................................................................14
Advantages for sellers...........................................................................................................................................14
Advantages for buyers..........................................................................................................................................14
RISK INVOLVED IN LETTER OF CREDIT.........................................................................................................14
Applicant's Risks in Letters of Credit...................................................................................................................14
Beneficiary's Risks in Letters of Credit................................................................................................................15
Issuing Bank's Risks in Letters of Credit..............................................................................................................15
Confirming Bank's Risks in Letters of Credit.......................................................................................................15
CASH IN ADVANCE..................................................................................................................................................16
APPLICABILITY OF CASH IN ADVANCE PAYMENT METHOD:..................................................................16
PROCEDURE OF CASH IN ADVANCE PAYMENT...........................................................................................16
HOW DOES IT WORK?..........................................................................................................................................17
TYPES OF ADVANCE CASH................................................................................................................................17
Wire Transfer........................................................................................................................................................17
Credit Card............................................................................................................................................................17
Escrow Service......................................................................................................................................................17
Payment by check.................................................................................................................................................18
ADVANTAGES OF ADVANCE CASH.................................................................................................................18
DISADVANTAGES OF ADVANCE CASH..........................................................................................................18
RISK INVOLVED IN THE CASH IN ADVANCE PAYMENT METHOD..........................................................19
For Exporter..........................................................................................................................................................19
For Importer..........................................................................................................................................................19
OPEN ACCOUNT TRANSACTION..........................................................................................................................20
WHEN TO USE THIS METHOD?..........................................................................................................................20
IMPORTANCE OF OPEN ACCOUNT METHOD................................................................................................20
CHARACTERISTICS OF AN OPEN ACCOUNT TRANSACTIONS..................................................................20
Applicability.........................................................................................................................................................20

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 Risk.......................................................................................................................................................................20
HOW EXPORTERS TACKLE THE RISK?............................................................................................................21
Export Working Capital Financing.......................................................................................................................21
Government- Guaranteed Export Working Capital Programs..............................................................................21
Export Credit Insurance........................................................................................................................................21
Export Factoring...................................................................................................................................................21
Forfaiting...............................................................................................................................................................21
PROS AND CONS OF OPEN ACCOUNT TRANSACTION................................................................................21
CONSIGNMENT PAYMENT METHOD...................................................................................................................23
CHARACTERISTICS OF CONSIGNMENT METHOD.......................................................................................23
CONSIGNMENT METHOD’S WORKING PROCESS.........................................................................................23
ADVANTAGES OF CONSIGNMENT..................................................................................................................23
For Consignor.......................................................................................................................................................23
For Consignee.......................................................................................................................................................24
DISADVANTAGES OF CONSIGNMENT............................................................................................................24
For Consigner........................................................................................................................................................24
For Consignee.......................................................................................................................................................24
RISK INVOLVED IN CONSIGNMENT METHOD.............................................................................................25
WHICH METHOD IS BETTER TO USE?..................................................................................................................26
REFRENCES:...............................................................................................................................................................27

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 ACKNOWLEDGEMENT

“In the name of Almighty Allah, the Most Gracious and the Most Merciful”

First and foremost, thanks and praise to Almighty Allah for giving us the strength, knowledge
and ability to complete this Report. We would like to express our sincere and heartfelt gratitude
to our research supervisor Ma’am RUKHSHINDA BEGUM for giving us the opportunity to
complete this Report We would highly grateful to the “UNIVERSITY OF KARACHI” for
providing us the platform to explore practical environment and we would also be thankful to our
“DEPARTMENT OF COMMERCE” for their support Last but not least we sincerely appreciate
and show our gratitude towards our parents for their love, care, prayers, financial and moral
support. Our thanks and appreciation also goes to our classmates, friends, and all those people
who supported and helped us directly or indirectly with their abilities to complete this research
within a limited time frame. This report has help us to understand rules, policies, accepted by
the government worldwide for the interpretation of most used payment terms in international
trade.

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 SUMMARY
For exporters, any sale is a gift until payment is received. For importers, any payment is a
donation until the goods are received. Successful exporters and importers recognize this
conundrum and are able to negotiate payment terms that recognize the inherent risk and yet meet
the needs of both parties.

There are five primary methods of payment in international trade that range from most to least
secure. Of course, the most secure method for the exporter is the least secure method for the
importer and vice versa. They key is striking the right balance for both sides. The most common
methods of payment in international trade include, Cash In Advance, Open Account,
Documentary Collection, Letters of Credit and consignment. 

There is no one payment option that is appropriate for all situations. Although cash in advance
offers the lowest level of risk for exporters, many customers engaged in international trade
cannot afford to pay in advance or do not want to do so. Even those customers willing to provide
payment in advance may not be able to buy as much as they want or need under those terms. As
a result, cash-in-advance payment terms can hamper an exporter’s ability to attract and retain
customers. In some cases, exporters may lose business to competitors that are willing and able to
offer more favourable terms of payment in international trade.

The good news is that there are other payment terms available for international trade. The first
step in choosing the right one is to monitor a customer’s ability to pay and any factors that might
influence or change that ability. 

The second step is to use this information to identify the range of payment terms the company is
willing to accept in order to accommodate customer needs. Each payment option has its pros and
cons so companies should choose carefully based on the customer’s country, industry,
creditworthiness, the length and strength of the relationship, and any other relevant criteria.

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 INTERNATIONAL TRANSACTION METHODS
An international transaction is a money transfer that crosses national borders, there are plenty of
international paying methods for importers and exporters across the globe. And as the world
continues to globalize, we’re seeing an increase in international payment modes.

There are a variety of ways that payments can be made, including a different level risk for
collection

DOCUMENTARY COLLECTION
Documentary collection is a procedure that allows a seller to give their bank instructions to
forward trade-related documents to the bank of a buyer. The instructions are normally
accompanied by a request for the documentation to be presented to the buyer for payment. The
request and instructions include the terms and conditions that dictate when the documents can be
availed to the buyer. The documents are availed to the buyer once they’ve made and finalized
payment. The process is normally termed “documents against payment.

A key document in a documentary collection is the bill of exchange or draft, which is a formal

demand for payment from the exporter to importer.

PARTIES INVOLVED IN THE DOCUMENTARY COLLECTION

 Principal - exporter, seller, remitter, drawer of the draft.
 Remitting Bank - exporter's bank handling the collection
 Presenting or Collecting Bank - usually the buyer's bank.
 Drawee - importer, buyer, payee.

PROCEDURE OF DOCUMENTARY COLLECTION

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 Figure 0-1 procedure of documentary collection
STEPS INVOLVED IN THE PROCESS OF DOCUMENTARY
COLLECTION.
1. The buyer (importer) and seller (exporter) agree on the terms of sale, shipping dates, etc.,
and that payment will be made on a documentary collection basis.
2.  The exporter, through a freight forwarder, arranges for the delivery of goods to the
port/airport of departure.
3.  The forwarder delivers the goods to the point of departure and prepares the necessary
documentation based on instructions received from the exporter.
4.  Export documents and instructions are delivered to the exporter's bank by either the
exporter or the freight forwarder.
5.  Following the instructions of the exporter, the bank processes the documents and
forwards them to the buyer's bank.
6. The buyer's bank, on receipt of documents, contacts the buyer and requests payment or
acceptance of the trade draft.
7. After payment or acceptance of the draft, documents are released to the buyer, who
utilizes them to pick up the merchandise.
8. The buyer's bank remits funds to the seller's bank or advises that the draft has been
accepted.
9. On receipt of good funds, seller's bank credits the account of the exporter.

TYPES OF DOCUMENTARY COLLECTIONS

Following are the main types of documentary collection.

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1 DOCUMENTS AGAINST PAYMENT
Documents against Payment (D/P) also known as "Sight Draft" or "Cash against Documents”
(CAD).  The buyer must pay before the collecting bank releases the title documents.

2 DOCUMENTS AGAINST ACCEPTANCE

 Documents against Acceptance (D/A). The buyer accepts a time draft, promising to pay for the
goods at a future date. After acceptance, the title documents are released to the buyer.

ADVANTAGES OF A DOCUMENTARY COLLECTION

 Documentary collection is Simple and inexpensive handling compared to letters of credit.
 Often faster receipt of payment than open account terms.
 Seller retains title to the goods until payment or acceptance is made.

DISADVANTAGES OF DOCUMENTARY COLLECTION

If the buyer refuses or is unable to pay, the seller has three options, which could be expensive:

 Find another buyer.

 Pay for return transportation
 Abandon the merchandise

RISKS ASSOCIATED WITH DOCUMENTARY COLLECTION

The buyer cannot inspect the goods at the port of arrival because he needs the documents to see
the goods. The seller assumes the risk that the buyer may not pay..

USED OF DOCUMENTARY COLLECTION

Numerous criteria are applied by businesses when determining which payment instrument to
offer as a term of sale. However, in general, a documentary collection would be appropriate 
where:

 The seller and the buyer know each other to be reliable.

 There is no doubt about the buyer's willingness or ability to pay.
 The political and economic conditions of the buyer's country are stable.
 The importer's country does not have restrictive foreign exchange controls.

IN WHICH COUNTRIES IT IS APPLICABLE?

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 It is generally limited to transactions between parties who have developed trust or are located in
countries with strong legal systems and contract enforcement.

LETTER OF CREDIT
A letter of credit or LC is a written document presented by the bank on the behalf of the
importer or buyer. The importer is the applicant of the LC, while the exporter is the beneficiary.
In an LC, the issuing bank promises to pay the mentioned amount as per the agreed timeline and
against specified documents. it provides an irrevocable guarantee to the exporter that, provided
the goods and/or services are delivered to the importer according to contractual terms and with
the compliant documents, it will be paid by the issuing bank. The obligation of the issuing bank
to pay the beneficiary of the letter of credit. It is useful when well-founded credit information
about a foreign buyer does not exist or is difficult to secure, but the exporter is satisfied with the
creditworthiness of the buyer’s foreign bank. Through its issuance, the exporter is assured that
the issuing bank will make a payment to the exporter for the international trade conducted. It
also protects the buyer as they do not need to make a payment until the goods have been shipped
as promised. LC is one of the most secure payment methods available to international traders.

ENTITIES OF A LETTER OF CREDIT

Firstly, let us understand the basic entities who are involved in a letter of credit.

 Applicant – the buyer or importer who applies for the letter of credit.
 Beneficiary – the seller or exporter for whom the letter of credit is issued. On completion
of the transaction, the beneficiary receives the payment.
 Issuing Bank – This is the bank that issues the letter of credit. This is usually a bank
whose branch is located in the applicant’s home country.
 Advising Bank -The advising bank is responsible for the transfer of documents to the
issuing bank on behalf of the exporter and is generally located in the country of the
exporter.

MECHANISM/PROCESS OF LETTER OF CREDIT

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 Figure 0-2 Mechanism / Process of LC

SALES CONTRACT.
The sales contract is the formal agreement between the buyer and the seller specifying the
terms of sales that both parties agreed upon terms. the contract includes the description of the
goods, amount of the unit price, the time allowed for shipment, required documents, the
currency and method of payment.

REQUEST FOR LC.

After a sales contract has been negotiated between the importer and exporter , and they have
agreed that a letter of credit will be used as the method of payment, Applicant will contact a
bank to ask for a letter of credit, by signing the bank's letter of credit application/agreement
form.

ISSUANCE OF LC
Once the issuing bank has assessed the buyer's credit risk, the bank will issue the actual
letter of credit instrument and sends it to the advising bank. meaning that it will provide a
promise to pay the seller upon presentation of certain documents.

DELIVER LETTER OF CREDIT TO THE SELLER

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 The advising bank forward the letter of credit to the seller (beneficiary), stating that no
commitment is conveyed on its part. however if the advising bank ask to confirm the letter
of credit and agrees to do so, the advising bank will also add its guarantee for payment.

SHIPMENTS OF GOODS
Having received the issuing bank's assurance of payment through advising bank , the seller
ships the goods to the buyer and prepares all the documents.

PRESENT DOCUMENTS TO THE ADVISING BANK

After the goods are shipped, the exporter presents the documents to the advising bank.

SEND THE DOCUMENTS TO THE ISSUING BANK

The advising bank checks the documents for discrepancies, and if no discrepancies are
found, they send the documents to the issuing bank.

VERIFICATION OF DOCUMENTS AND CLAIM FOR PAYMENTS

The issuing bank also examines the documents and claims for the payment from importer.
The buyer makes complete payment plus the bank charges to the issuing bank.

TRANSFER THE DOCUMENTS TO THE BUYER

After receiving the payment, the issuing bank gives the documents to the buyer.The buyer
clears the goods from the shipping line through these documents.

TRANSFER PAYMENT TO ADVISING BANK

The issuing bank will transfer full payment of importer to the advising bank.

PAYMENT TO THE SELLER

Advising bank deducts its own service charge and transfers the remaining payment to the
seller..

TYPES OF LETTER OF CREDIT

The basic types of letter of credit are as follows.

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IRREVOCABLE/ REVOCABLE LETTER OF CREDIT
Whether a LC is revocable or irrevocable determines whether the buyer and the issuing bank
are able to manipulate the LC or make corrections without informing or getting permissions
from the seller. But now all LCs are irrevocable, hence in practice the revocable type of LC
is increasingly obsolete. Any changes or cancellation of the LC is done by the applicant
(buyer) through the issuing bank. It must be authenticated and approved by the beneficiary it
cannot be cancelled or modified without consent of the beneficiary (Seller).

STAND-BY LETTER OF CREDIT .

A standby letter of credit is a legal document that guarantees a bank's commitment of
payment to a seller in the event when the Buyer fails to fulfill payment liabilities to Seller.

CONFIRMED LETTER OF CREDIT .

An LC is said to be confirmed when the Seller's bank adds its confirmation (or guarantee) to
honor a complying presentation at the request or authorization of the issuing bank.
Irrespective to the payment by the issuing bank, the confirming bank is also liable for
performance of obligations.

UNCONFIRMED LETTER OF CREDIT .

Only the issuing bank will be liable for payment of this LC.

TRANSFERABLE LETTER OF CREDIT .

A transferable letter of credit is a type Lt, that additionally allows the first beneficiary to
transfer some or all of the credit to another party, which creates a secondary beneficiary.
This LC is especially beneficial in those cases when the Seller is not a sole manufacturer of
the goods and purchases some parts from other parties, as it eliminates the necessity of
opening several LC's for other parties.

BACK-TO-BACK LETTER OF CREDIT

This LC type considers issuing the second LC on the basis of the first letter of credit. LC is
opened in favor of intermediary as per the Buyer's instructions and on the basis of this LC
and instructions of the intermediary a new LC is opened in favor of Seller of the goods.

PAYMENT AT SIGHT LETTER OF CREDIT.

According to this LC, payment is made to the seller immediately (maximum within 7 days)
after the required documents have been submitted.

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DEFERRED PAYMENT LETTER OF CREDIT.
According to this LC the payment to the seller is not made when the documents are
submitted, but instead at a later period defined in the letter of credit. In most cases the
payment in favor of Seller under this LC is made upon receipt of goods by the Buyer.

RED CLAUSE LETTER OF CREDIT.

It is a type of Letter of Credit that includes a special clause of facilitating the seller with
advance payment for an agreed amount of the LC before shipment of goods and submittal of
required documents. This red clause is so termed because it is usually printed in red on the
document to draw attention to "advance payment" term of the credit.

ADVANTAGES OF LETTERS OF CREDIT

The main advantage of using a letter of credit is that it can give security to both the seller
and the buyer.

ADVANTAGES FOR SELLERS

1. it provides an irrevocable guarantee to the exporter that, provided the goods and/or
services are delivered to the importer according to contractual terms and with the
compliant documents, it will be paid by the issuing bank.
2. The risk of non-payment is transferred from the seller to the bank (or banks)

ADVANTAGES FOR BUYERS

1. It also protects the buyer as they do not need to make a payment until the goods have
been shipped as promised.
2. The bank will pay the seller for the goods, on condition that the latter presents to the
bank the determined documents in line with the terms of the letter of credit

RISK INVOLVED IN LETTER OF CREDIT .

Letters of Credit are often used in international transactions to ensure that payment will be
received where the buyer and seller may not know each other and are operating in different
countries. In this case, the seller is exposed to a number of risks such as credit risk, and legal
risk caused by the distance, differing laws and difficulty in knowing each party personally.
Some of the other risks inherent in international trade include:

APPLICANT'S RISKS IN LETTERS OF CREDIT

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 Applicant's risks in a letter of credit transaction can be classified under shipment risks,
issuing bank's failure risk and fraud risks.

 Risks Related to Shipments: These may include situations where there is a non-delivery
of Goods, Short shipment, the goods are of inferior quality, are damaged, or are late.
 Fraud Risks: Applicants are exposed to fraud risks, that are commonly originated from
the acts of the beneficiaries. This scenario becomes reality if the beneficiary gets his
money from the confirming or issuing bank against forged documents.

BENEFICIARY'S RISKS IN LETTERS OF CREDIT

Beneficiary's risks in a letter of credit transaction can be classified under discrepant
documents risks and fraud risks,

 Discrepant Documents Risks: If the banks figure it out that the documents are
discrepant, then beneficiaries can only reach the payment upon applicant's acceptance of
the documents. Issuing Bank

 Fraud Risks: Applicants can receive funds under letters of credit via forged documents
by shipping under quality goods .

ISSUING BANK'S RISKS IN LETTERS OF CREDIT

 Insolvency Risk of the Applicant: Issuing bank may not be able to recover the credit
amount that has already paid to the beneficiary, if applicant becomes insolvent after
issuance of the letter of credit.

CONFIRMING BANK'S RISKS IN LETTERS OF CREDIT

 Fraud Risk: The bank will be exposed to a risk of fraud by the seller, who may provide
incorrect or falsified documents to receive payment. If the bank ought to have known that
the documents were a fraud, then the bank will be exposed to a fraud.

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 CASH IN ADVANCE
Cash in advance is a payment term used in some trade agreementin which the exporter
receives the payment before the shipment of goods.

This method is most Secure and most beneficial from exporter perspective as he receives
funds in advance this minimize the exporters risk and financial cost since their is no
collection risk and no interest cost or receivable The payment may be received either as soon
as the order is confirmed or any time before shipment. This exporter may be willing to
impose the term as a pre condition only when he knows that the goods are in
overwhelmingly demand and the goods are of rare nature Advance payment may be also
used to cover initial supply costs

However with a importer s point of view advance payment Carriers little risk and importers
rarely agree to these terms, since it ties up their capital and the goods may not be received.
Advance payment of term in import and export is picked by Purchaser only when he knows
the seller in details or genuineness as a seller so for this method to work the importer must
know and trust the exporter.

APPLICABILITY OF CASH IN ADVANCE PAYMENT METHOD:

In international trade, Cash in Advance methods of payment is usually used when;

 The importer is a new customer and/or has a less-established operating history.

 The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.

 The political and commercial risks of the importer’s home country are very high.

 The exporter’s product is unique, not available elsewhere, or in heavy demand.

 The exporter operates an Internet-based business where the acceptance of credit card
payments is a must to remain competitive.

PROCEDURE OF CASH IN ADVANCE PAYMENT

Figure 0-3 Procedure of cash in advance payment 8

HOW DOES IT WORK?
With the Cash in Advance payment method, importer pays Exporter prior to shipment of
goods. Shipping documents are handled directly by importer and exporter.

TYPES OF ADVANCE CASH

There are four typical cash-in-advance payment methods that international sellers and
buyers may agree to use:

WIRE TRANSFER
It is the most Secure and Preferred Cash-in-Advance Method

An international wire transfer is commonly used and is almost immediate. Exporters should
provide clear routing instructions to the importer when using this method, including the
receiving bank’s name and address, SWIFT (Society for Worldwide Interbank Financial
Telecommunication) address, and ABA (American Banking Association) number, as well as
the seller’s name and address, bank account title, and account number. This option is more
costly to the importer than other cash-in-advance options as the fee for an international wire
transfer is usually paid by the sender.

CREDIT CARD
A Viable Cash-in-Advance Method
Exporters who sell directly to foreign buyers may select credit cards as a viable cash-in
advance option, especially for consumer goods or small transactions. Exporters should check
with their credit card companies for specific rules on international use of credit cards. The
rules governing international credit card transactions differ from those for domestic use.
Because international credit card transactions are typically placed using the Web, telephone,
or fax, which facilitate fraudulent transactions, proper precautions should be taken to
determine the validity of transactions before the goods are shipped. Although exporters must
endure the fees charged by credit card companies and take the risk of unfounded disputes,
credit cards may help business grow because of their convenience.

ESCROW SERVICE
A Mutually beneficial Cash-in-Advance Method
Exporters may select escrow services as a mutually beneficial cash-in-advance option for
small transactions with importers who demand assurance that the goods will be sent in

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 exchange for advance payment. Cross-border escrow services are offered by international
banks and firms that specialize in escrow and other deposit and custody services. Escrow
protects both exporters and importers by placing funds in the hands of a trusted third party
until a specific set of conditions are met.

PAYMENT BY CHECK
A Less-Attractive Cash-in-Advance Method

Advance payment using an international check may result in a lengthy collection delay of
several weeks to months. Therefore, this method may defeat the original intention of
receiving payment before shipment. If the check is in U.S. dollars and drawn on a U.S. bank,
the collection process is the same as for any U.S. check. However, funds deposited by non-
local checks, especially those totaling more than $5,000 on any one day, may not become
available for withdrawal for up to 10 business days due to Regulation CC of the Federal
Reserve (§ 229.13 (ii)). In addition, if the check is in a foreign currency or drawn on a
foreign bank, the collection process can become more complicated and can significantly
delay the availability of funds. Moreover, if shipment is made before the check is collected,
there is a risk that the check may be returned due to insufficient funds in the buyer’s account
or even because of a stop-payment order.

ADVANTAGES OF ADVANCE CASH

 With the cash-in-advance payment method, the exporter can eliminate credit risk or the
risk of non-payment since payment is received prior to the transfer of ownership of the
goods.
 This is the easiest simplest method as compared to other payment methods.
 Cash in advance provides the working capital you need to process the order there’s no
strain on cash flow.
 It is by far the most secure payment method for the exporter as it works on the 100%
payment from the importer.
 Low cost – it enables cost controlling with the help of low expenses
 It provides guarantee to the exporter.
 Advance cash can be an effective marketing tool by promoting scarcity and creating
marketing buzz around an upcoming product .
 It can negotiate much better price from the seller .

DISADVANTAGES OF ADVANCE CASH

8
  This is considered as the least attractive and competitive option because it generates the
unfavourable cash flow problems
 For the buyer as cash in advance is the riskiest way for them to do Business they part
With their money up front but have no guarantee will deliver the goods
 This method can also tie up a buyer’s cash while they are waiting for the delivery
 If the buyer has to follow all or some of the amount this adds another step to their
process and with interest payments could increase their total cost to buy your product as
well
 Few international customers agree to Cash in advance purchase
 It can also be problematic and risky for the buyer is they might receive the wrong
product, the quality issue may happen and the importer pretty much be on the mercy of
the exporter
 exporters who insist on this payment method as their sole manner of doing business may
lose to competitors who offer more attractive payment terms.
 No additional earnings through financing operations of a stop-payment order.

RISK INVOLVED IN THE CASH IN ADVANCE PAYMENT METHOD

FOR EXPORTER
This is by far the safest and best mode of payment in international trade for the exporter in
which they ship the goods to the buyer only after the receipt of payment of goods depending
on the terms agreed upon the payment may be full or partial

FOR IMPORTER
Cash in advance presents a lot of risk for the importer this is because it puts them in a
position where the exporter still has the possession of the goods and has already received
payments for the goods it also creates unfavourable cash flow situation for the importer
because they have to pay all the price upfront and in cash a position most buyers try to
avoid.

The buyer faces the following risk using this system

 Local regulations might not allow advance payment to a seller.

 The risk that the seller might not be able to fulfil the contract.
 Regulations in the seller’s country that might prohibit the sending of the goods.

Obviously, this payment option will only be available in rare situations. This can include
where the order size is very small, or situations where the exporter is in a very strong

8
negotiating position (such as where the goods are scarce). It can also be an option for
exporters who are not convinced of the importer’s credit-worthiness, or where the importer
completely trusts the seller.

As a result, exporters will very rarely offer this payment term because it presents so much
risk for the buyer. If you want to attract more sales or a higher caliber of buyers, you will
need to be more flexible with your payment terms, except where the special circumstances
mentioned above exist.

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 OPEN ACCOUNT TRANSACTION
Open accounts are trade finance solutions that are very common in cross- border trade
transactions. With open accounts, goods are produced and shipped by the exporter and
received by the importer before payment for the goods is made or become due. Payment by
the importer for the transaction is then typically due in 30, 60 or 90 days after goods are
shipped and delivered to the buyer. In open account transactions, the exporter extends credit
terms directly to the importer without the involvement of a third party (trade finance
provider). While certainly not long term import financing, 90 days may well be the enough
time for the importer to receive and resell the shipment without ever having come out of
pocket.

Open accounts are in many respects similar to consignment purchases, at least in so far as
the importer’s payment for the shipment to the exporter is not due until after the shipment
has been received by the importer or in many cases, not until after the importer has resold
the goods to his customers.

WHEN TO USE THIS METHOD?

It is appropriate to use when seller has absolute trust that the buyer will accept shipment and
pay at decided time. Seller is confident that importing country will not impose regulations
deferring or blocking transfer of payment. Seller has sufficient liquidity or access to outside
financing to extend deferred payment terms.

IMPORTANCE OF OPEN ACCOUNT METHOD

Due to extreme competition in export markets, foreign buyers often press exporters for open
account terms. Exporters who are reluctant to extend credit may lose a sale to their
competitors.

CHARACTERISTICS OF AN OPEN ACCOUNT TRANSACTIONS

APPLICABILITY
This method is applicable in low-risk trading relationships or markets and in competitive
markets to win customers with the use of one or more appropriate trade finance techniques.

RISK

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 There is substantial risk to the exporter because the buyer could default on payment
obligation after shipment of the goods. Each method has a different level of non- payment
risk for the exporter, and non-delivery risk for the buyer.

HOW EXPORTERS TACKLE THE RISK?

The exporters can tackle the risk by using following trade finance techniques.

EXPORT WORKING CAPITAL FINANCING

The exporters who lacks sufficient liquidity needs export working capital financing that
covers the entire cash cycle from purchase of raw materials through the ultimate collection
of the sales proceeds. Loan or resolving line of credit.

GOVERNMENT- GUARANTEED EXPORT WORKING CAPITAL

PROGRAMS
Government guarantees on export loans do not make exporters immune to the risk of non-
payment by foreign customers. Rather, the government guarantee provides lenders with an
incentive to offer financing by reducing the lender’s risk exposure.

EXPORT CREDIT INSURANCE

It provides protection against commercial losses- default, insolvency, bankruptcy, and
political losses-war, nationalization, currency inconvertibility.

EXPORT FACTORING
Export factoring means purchase, funding, management and collection of short term
accounts receivable based on goods and services provided to foreign buyers. Goods are
delivered on open account credit terms up to 180 days and without the need of securing by
any payment instrument.

FORFAITING
It is the method of trade finance that allows exporters to obtain cash by selling their medium
and long term foreign accounts receivable at a discount on a “without recourse” basis means
that the forfeiter assumes and accepts the risk of non- payment.

PROS AND CONS OF OPEN ACCOUNT TRANSACTION

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This method is the most secure method for the buyer as payment is not obligatory until the
goods have been received. It may increase market competitiveness as there is no risk for the
buyers. It is the most advantageous to the buyer in terms of cash flow and cost, but it is the
least secure method for the sellers; hence sellers in many riskier industries do not accept this
payment method. Payment on open account terms may strain seller’s cash flow especially if
he provides extended payment terms. If the export contract is in foreign currency, seller is
exposed to exchange rate risk from the date of the sale contract to the time of payment.

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 CONSIGNMENT PAYMENT METHOD
Consignment is another method of an open account in which payment is sent to the exporter
only after the goods are sold by the foreign distributor to the end customer. An international
consignment transaction is based on a contractual arrangement in which the foreign
distributor receives, manages, and sells the goods for the exporter who retains title to the
goods until they are sold.

CHARACTERISTICS OF CONSIGNMENT METHOD

 The keeping of the goods transfer from one party to another.
 The exporter is responsible for all the risks, expenses, and damages associated with the
consigned goods.
 The relation of the persons in the consignment is that the consigner (owner) and the
consignee (agent) not the buyer and seller.
 Only the keeping of the goods is with the consignee and not the ownership.
 Profit and loss on the sale of the goods belongs to the owner only.
 The consignor sends Pro-forma Invoice. While the consignee sends Account Sales. Account
Sales include the details regarding the goods, sales, expenses, commission, advances, and
balances due.

CONSIGNMENT METHOD’S WORKING PROCESS

1. Forming an agreement and decides the terms & condition.
2. Exporter sends the goods on consignment to the foreign seller.
3. Foreign seller separates the goods suitable for sales.
4. Foreign seller sale goods and unsold goods will be returned back.
5. Foreign seller can buy goods if it is mentioned in agreement.
6. Final payment has to be done from both sides.

ADVANTAGES OF CONSIGNMENT

FOR CONSIGNOR
 Increased sales and margin if the consignor is assigning the responsibility of the goods to
a skilled and experienced consignee.
 Since the ownership is with the consignor, he may at any time reclaim those goods in the
case of any default from the consignee’s end.

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  Inventory holding costs are lessened as the goods are sent to the consignee and are in his
possession.
 If the sellers want to increase their sales and do not have time to promote their product or
look after the customer, they prefer hiring an agent to look after the same.
 If the consignee is well versed with the buyer, market, product etc. He may sell the
product very fast hence this would lead to product expansion, better market share,
increased sales etc.

FOR CONSIGNEE
 The consignee has to pay for only those goods that are sold.
 The consignee sometimes does not have to pay for some expenses if it agreed as per the
agreement.
 If the consignee is well versed with the product, he may sell the goods faster thereby
increasing his share of revenue.
 In the case of huge demand, he may earn higher revenue, as he need not incur any
expenses of the shipping also not to worry about the lead time.

DISADVANTAGES OF CONSIGNMENT

FOR CONSIGNER
 Since the consignee is not the owner and does not face any monetary risk, he may not
take his agreement seriously. Hence, he may not promote sales.
 Sometimes the consignor pays huge shipping charges but shipping a large amount of
inventory instead of paying for smaller inventories to the consignee. However, the goods
may or may not sell. So, if the goods don’t sell, he suffers a huge loss as he remains to be
the owner and they still have to count it as a part of his cost assessment.
 The consignor has to keep waiting for the payment creating uncertainty in regards to
when and how much will be receipt of the sales proceeds from the consignee. So, until
there is a sale of all or some of the goods, the consignor has to wait for the payment
leading to an imbalance in cash flows.
 If the consignor sells the product directly into the market, he may earn comparatively
higher revenue by removing the excess profit margin of the consignee.

FOR CONSIGNEE
 If the consignee carries a bad reputation in a particular market, he may not be able to sell
the goods so easily.

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  The biggest con for the consignee is that he occurs a holding cost for that inventory either
in his good own or in his store. That inventory may or may not sell. So, in the case of
unsold goods, he suffers a loss.
 If the consignee repeatedly fails to sell the goods in time, he may either be discharged as
an agent or would receive a lesser commission.
 If in the case of no sale of the goods and there is a possibility of it getting deteriorated,
the consignee may have to buy them.

RISK INVOLVED IN CONSIGNMENT METHOD

 The party supplying the stock faces the biggest risks under a consignment agreement.
For one, the consignor will not receive any money until part or all of the consigned stock
has been sold. In effect, the consignor’s cash flow may suffer as more money is spent on
manufacturing the goods, while cash coming in may be too slow to cover subsequent
production runs.
 Next, the consignor may be exposed to higher product returns if the agents or consignees
simply allow the goods to rot or become damaged in warehouses. After all, the
consignee does not have any money invested in the consigned merchandise. Without a
good profit sharing agreement, the consignee may not be too keen on pushing the
consignor’s products in the market.  
 In addition, since resupplying or restocking the consignment inventory is done regularly,
there is a risk of overstocking or duplicate inventories. This could be detrimental for
both the consignor, who would have more goods sitting idly in the agent’s warehouse,
and for the consignee, who may spend more on inventory storage costs.
 Lastly, the record keeping systems of the party consigning the goods and the retailer or
agent are not always the same. So, a consignment stock may become disadvantageous if
it brings about discrepancies in the records of both consignor and consignee. For the
consignee, any misplaced item could mean paying for something that has not generated a
profit. Meanwhile, inconsistencies on the consignor’s side could lead to lost
merchandise.


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 WHICH METHOD IS BETTER TO USE?
The safest method for the buyer is essentially the least safe option for the seller, and vice
versa. Therefore, when negotiating for payment methods, it’s always safe to go for the
options that both parties can accept such as letters of credit and documentary collections.
Level of Risk for Importer

Cash in
advance
Letter of
Credit
Documentar
y Collection
Consignment
Open
Account
Level of Risk for Exporter ( Safest to riskiest)

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 REFRENCES:
https://www.morethanshipping.com/five-payment-methods-in-international-trade-for-
exports-and-imports/

https://www.toskglobal.com/2021/02/19/consignment-payment-method-in-international-
trade-pros-and-cons/