Popular Methods/Modes of

Payment in International Trade

• Significance of methods of payment in
lnternational Trade
• Limitations of method of payment in
international trade
Types of Modes of Payment in
International Trade
To be competitive in business today,
business owners need to think globally.
To sell internationally, it’s critical to offer
appropriate payment methods that are safe
and have favorable terms for both the buyer
(importer) and the seller (exporter).
Contd.

There are risks involved in international trade.

Importers want to receive their goods before
making payment, and exporters want to be
paid before they release the goods.
This is why reliable payment methods are
important.
Contd.
There are 4 main types of payment methods:
 Cash in advance
 Letter of Credit (L/C)
 Open Account
 Counter Trade
1.Cash in Advance
 Also called ‘advance payment’ or ‘cash with order’,
cash in advance means exactly what it sounds like.
 It is a mostly straightforward payment method
where the importer (usually the buyer) pays for the
goods upfront and before shipment.
 The payment may be completed by any means
agreed between the exporter and the importer.
 Popular options include wire transfer, international
cheque, and payment by debit card.
Benefits of Cash in Advance

 This payment term clearly favors the exporter because

they receive payment while still in possession of the
goods.
 Cash in advance provides the working capital exporter
need to process the order; there’s no strain on cash flow.
 The exporter operates an internet-based business where
the acceptance of credit card payments is a standard
way of conducting business transactions.
Limitations of Cash in Advance

 Thisis the least desirable method for importers

because they have the risk of goods not being
shipped.
 Cashin advance is usually only used for small
purchases.
 Noexporter who requires only this method of
payment can be competitive.
Contd

It also creates an unfavorable cash flow

situation for the importer because they have
to pay all of the price upfronts and in cash
a position most importers/buyers try to
avoid.
2.Letter of Credit

 A letter of credit (LC), also known as a documentary

credit or bankers commercial credit, or letter of
undertaking, is a payment mechanism used in
international trade to provide an economic guarantee
from a creditworthy bank to an exporter of goods.
 The issuing bank will typically use intermediary
banks to facilitate the transaction and make payment
to the exporter.
Contd.

 Letters of credit are used extensively in the

financing of international trade, when the
reliability of contracting parties cannot be readily
and easily determined.
 LCs can be arranged easily for one-time
transactions between the exporter and importer,
or used for an ongoing series of transactions.
Benefits of Letter of Credit

 LCs are one of the most versatile and secure

instruments available to international traders. Since
LCs are credit instruments, the importer's credit
with their bank is used to obtain an LC.
 Ittransfers the credit-worthiness from the exporter
or buyer to the issuing bank. The importer can do
any number of transactions at the same time when
he is backed by an established and larger institution.
Contd.

A letter of credit is safer for the exporter in

case the importer goes bankrupt. Since the
creditworthiness of the seller is transferred
to the issuing bank, it is the bank’s
obligation to pay the amount as agreed in
the letter of credit.
LC promotes instant liquidity.
Limitations of Letter of Credit

It is generally considered to be very

expensive, as the banks involved will
typically charge significant fees.
A letter of credit follows complex governing
rules and has chances that it can be misused
to take advantage of the applicant.
Contd.

A letter of credit fears of a material fraud risk to

the importer. The bank will pay the exporter
upon looking at the shipping documents
thoroughly and not the actual quality of goods
displayed.
 A letterof credit has an expiration date and must
be used before it .
Contd.

LCs are often treated by issuers like loans.

LCs must be changed each time there is an
amendment in amount or terms or clauses.
LCs are often tough to terminate or cancel.
3.Open Account

 An open account transaction in international trade

is a sale where the goods are shipped and
delivered before payment is due, which is for pre-
specified time typically in 30, 60 or 90 days
 Under an open account, the goods, along with all
the necessary export documents, are shipped
directly to the importer who has agreed to pay the
exporter’s invoice at a specified date.
Contd.

 Though open account terms will definitely

enhance export competitiveness, exporters
should thoroughly examine the political,
economic and commercial risks as well as
cultural influences to ensure that payment will be
received in full and on time.
Benefits of Open Account

 It facilitates to mitigate the risk of non-payment

associated with open account trade by using trade
finance techniques such as export credit insurance and
factoring.
 Open account terms may help win customers in
competitive markets.
 Itcan make an exporter’s products more competitive
and may even allow them to charge more for their
goods.
Limitations of Open Account

Open account is riskey and the firm should

structure such payment methods with care.
This method is appropriate only with
customers of longstanding or excellent
credit,or with a subsidiary owned by the
exporter.
4.Counter Trade

 Countertrade means exchanging goods or

services which are paid for, in whole or part,
with other goods or services, rather than with
money.
A Monetary valuation can however be used in
countertrade for accounting purposes. In dealings
between sovereign states, the term bilateral trade
is used.
Benefits of Counter Trade

Allows for entry into difficult markets.

Increases company sales where person might
not otherwise have business.
Overcomes credit difficulties.
Allows for disposal of declining or surplus
products.
Contd.

Gains competitive advantage over the

competition. (Business men don’t want to
lose a market share as a result of
competitors.)
Limitations of Counter Trade

 The time-consuming nature. As in any

unconventional tactic, there will be haggling over
the good trades, so expect a long, drawn-out
negotiation until all parties are satisfied.
 Higher transaction costs (including brokerage, for
instance). Costs can quickly add up, especially
while looking for a buyer for the goods,
commissions to middlemen, and more.
Contd.

Logistical issues, especially if commodities

are involved.
Greater uncertainty on the value of the
goods being traded and uncertainty on the
quality of the goods.
Negotiation complexity
Presented By : Binesh Tyata
G-mail: bineshtyata10@gmail.com
Quest International College, Gwarko, Nepal