Methods Of Payment

Submitted By Prashasti Rajvanshi

Methods of Payments

Payment in Advance

Documentary Bills

Documentary Credit under letters of Credit

Open Account with periodic settlement

Shipment on Consignment Basis

1. Payment in Advance

Most favored method of payment

No credit or transfer risk to the exporter in the contract

Exporter receives payment from the importer, in

advance

Receipt of payment can be at the time of receiving the

order

Slight risk in the form of exchange risk from the date of

contract till the date of receipt of payment

Importer seldom accepts this method of payment

2. Documentary Bills

Exporter sends the shipment to the importer, submits

the trade documents to his bank and entrusts it
collection of a payment from the importer

Exporters bank-remitting bank

Importers bank-collecting bank

Remitting bank submits the trade documents to the

collecting bank for making the payment and handing
over the documents to the importers.

Features

Next best alternative

Exporter unwilling to part with documents of title till

he receives the payment

Documents are routed through the bank

Satisfies the claims of both the parties

Forms of Documentary Bills

A. Document against payment

The exporter retains the title to the shipment until

the goods has reached the importers country and
payment for the same has been made.

Importer also makes the payment on arrival of the

goods in his country

Minimal risk to both parties

Document is delivered by the bank only on payment.

Documents are sent to correspondents bank where

the importer is located.

B. Document against
Acceptance

Exporter draws usance bill on importer.

Usance period is 30 to 180 days.

The exporter is willing to ship the goods and also

prepared to part with the title and possession of the
same, before payment is received.

3. Letters of Credit

Aletter of creditis a document issued by a financial

institution or a similarly accredited professional party. The
letter assures payment to a seller of goods or services
provided certain documents have been presented to the
bank.

"Letters of Credit" are documents that prove the seller has

performed the duties specified by an underlying contract
(e.g., the sale of goods contract) and the goods/services
have been supplied as agreed.

In return for these documents, the beneficiary receives

payment from the financial institution that issued the letter.

Features

Highly popular in recent times

Elimination of credit and payment risks

Credit of the banker is substituted for that of

computer

Negotiating bank makes the payment hence no risk

Involved Parties

Applicant = Buyer/ Importer

Beneficiary = Seller/Exporter

Opening Bank = Importers Bank >> Issues L/C

Advising Bank= Exporters Bank >> Advises L/C

Confirming Bank = Advising Bank or 3rd Party Bank >>

Confirms L/C

Paying Bank = Any Bank as Specified in L/C >> Pays

the Draft

Types of Letter of Credit

Documentary Letter of Credit This LOC specifies the various

documents that are required to be submitted by the exporter to
importer.

Revocable & Irrevocable Credit Under revocable letter of credit,

the opening bank reserves the right to cancel or modify the credit, at
any time, without the consent of the beneficiary.

In case of irrevocable letter of credit, the opening bank has no right

to change the
terms of credit, without the consent of the beneficiary.

With recourse or without recourse Under with recourse the

negotiating bank can make the exporter liable, in case of default in
payment by the opening bank.
Under without recourse the negotiating bank has no recourse to the

Confirmed and Unconfirmed LOC After confirmation the LOC

becomes confirmed and irrevocable. Once a confirmation is added,
the confirming bank which is normally the correspondent bank of
the opening bank, adds a clause to the effect.

Transferable & Non transferrable Under transferrable exporter

can transfer the credit fully or partially to one or more parties.

Freely negotiable and Restricted LOC The LOC doesnt put any
condition for the negotiation of documents. In case the credit names
a specific bank for negotiation, then the LOC is restricted one.

Fixed and Revolving A fixed LOC is for a fixed period of time and
amount.
In case of revolving the LOC would be revived automatically for the
same
time and amount once it is exhausted.

Red Clause and Green Clause LOC - A red clause is one that
authorises the exporter to avail pre-shipment finance on strength of
the credit.

In green clause in addition to pre-shipment finance, storage

facilities are allowed at the
port of shipment.

Back to back LOC This provides pre-shipment finance to the

beneficiary.

Assignable and Non assignable LOC An assignable LOC can be

assigned to a third party by the beneficiary of the credit.
A non-assignable is one that cant be further assigned.

Deferred period of Credit In this period of credit, the supplier

provides credit to the buyer after supply of goods.

Stand By credit The credit assures the beneficiary that in the

4. Open Account with Periodic

Settlement

This form of payment is made when the exporter &

importer are inter connected companies

Real risk to the exporter as no documentary proof to

establish obligation on the part of importer to make the
payment

The buyer has to make the payment, immediate to the

receipt of goods

Very simple method of payment with no additional costs

Only possible when exporter is financially strong

How does it work?

In negotiating an export contract,
the exporter agree with the buyer
the amount, currency, timing and
method of payment.

When a payment is due, your

buyer will usually send it by
Telegraphic (wire) transfer through a
bank or
International bank cheque (bank
draft)

When he ships the goods or provide

the services, the buyer receives an
invoice setting out those payment
details. Control of the goods passes
to the buyer before you receive
payment.

The credit term agreed with the

buyer is also stated on the invoice.

5. Shipment on Consignment
Basis

Seller ships the goods to his agent or representative

Exporters retain legal title although physical possessions is with

the agent

No financial security to the exporter if the agent is dishonest

Advantage is that the buyers have an opportunity to inspect the

goods and can pay higher price if they are satisfied with the
quality