Types of Payment in Foreign Trade
International trade provides new expansions to business world, however, on the other hand it creates risks in terms of parties who are involved in trade and do not know well each other because they have different legal systems and statutes.
The dilemma that the exporters and importers face with is how to get involved in international trade in a reasonable risk level.
What are the basic risks with regard to exporters and importers?
IMPORTER: Timely and correctly shipment of the goods as it is ordered
EXPORTER: Making payment
These are the payment types in which the exporter and the importer undertake risks:
Payment with letter of credit
It is the commitment of a bank (issuing bank) for the payment of a specific amount in a specific period against the representation of the documents which are foreseen in the letter of credit in terms of claims and instructions of the buyer (customer).
International trade is organized by the banks with the letter of credit. The letter of credit brings into safety for the parties and when the conditions of the letter of credit are fully performed, it is considered that the payment is guaranteed and the payment is based on the documents.
Accredited transactions are subject to a brochure called "Uniform Customs and Practices for Documentary Credits" Nr. 500 of International Chamber Of Commerce. Unless otherwise is stated, the above mentioned brochure is binding for all parties.
In the letter of credits, banks make transactions by considering documents not the goods.
Letter of Credit may be
- Irrevocable/Confirmed
- Irrevocable/Unconfirmed
or
- Revocable/Unconfirmed
Letter of credits may be issued as payment against the presentation of document, futures (delayed) payment or to be used (paid) with either acceptance or purchase.
It is determined to issue a letter of credit via sales contract. To fulfill the provisions of this sales contract important offers his bank (issuing bank) to issue a letter of credit. The letter of credit is issued and sent to a bank in the country of the exporter. Bank of the exporter informs the exporter against the letter of credit. Then, the exporter loads the goods and gets the documents which are necessary to be submitted in regard to the L/C sent via his issuing bank to the bank of importer. If the submitted documents fit the conditions of the L/C, the bank makes the payment to the exporter. The bank of the importer clearly collects the payment and submits the documents for the clearance of the goods.
Benefits of the L/C for the exporter
Assuring the payment
-L/C is an agreement which is signed between the issuing bank and the exporter.
- Exporter is not binded to the importer for the payment.
- Payment shall be collected by the importer not by the bank.
Benefits of the L/C for the exporter
Presentation of the documents which show the shipment is performed
- Issuing bank makes the payment against the submission of the documents which shows that the shipment is timely and correctly fulfilled.
Documents Against Payment
Collection means that the exporter get benefit from the services of a bank to collect the value of the goods from the exporter. In Documents Against Payment, after the exporter loads the goods, he send the shipment documents in the annex of collection instruction to the bank which is in country of the importer via a bank in his country or a representative in the country of the exporter; and after the payment or the acceptance of the issued policy by the importer he delivers the goods to the importer. Bank of the exporter does not deliver the necessary documents (such as shipment document, invoice, etc.), if the importer does not pay or accept the policy in the transactions with a policy which is necessary for custom clearance.
In the collection, banks do not guarantee any payment to the exporter.
Collection transactions are subject to the brochure of International Chamber of Commerce called "Uniform Rules for Collections" Nr. 522.
An exporter who decides to collect the value of goods or services on the basis of collection transactions takes the risks no matter what level is, because he sends or gives service before the payment of the goods are assured. So that, in a collection transaction the exporter
- should fully trust the importer,
- should have no doubts of the payment ability of the importer; and
-the political, economic and juridical conditions of importation country should be stable.
Cash Against Goods
In cash against goods, importer pays the price of the good he bought after goods arrive to the place of destination designated in the sales contract and are received. In this type of payment, exporter sends the documents that represent the good to the importer either directly or free of charge via bank after he delivers the goods in the name of the buyer. İmporter pays for the price of the goods after he clears the goods from the customs. In this type of payment, importer has advantage because he can control and clear the goods without making any payment. Exporter has a risk because importer may not pay the price of the goods. Payment of the price of the goods can be guaranteed by signing a surety by the bank after importer accepts the policy that has been drawn on importer by the exporter.
Cash in Advance
Cash in advance takes place when importer pays the price of the goods to the exporter via his own bank, and exporter sends the goods to the importer after he receives payment. In this payment there is a credit that importer gives to the exporter. In cash in advance method, exporter of the goods is completely secure, but importer is at risk. If exporter doesn’t send the goods or the goods that he sends aren’t appropriate, importer can be in a difficult situation and suffer a loss. For this reason, buyer should trust the seller.