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Methods of payment in International trade

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Methods of payment in International trade

  1. 1. Methods of Payment Course Instructor: Sneha Sharma
  2. 2. Methods of Payment for Export Sales Cash in Advance Open Account Letter of Credit Sight Bill Usance Bill
  3. 3. Cash in Advance/Advance Payment  With cash-in-advance payment terms,  an exporter can avoid credit risk because payment is received before the ownership of the goods is transferred.  For international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters.
  4. 4. Cash in Advance/Advance Payment
  5. 5. Open Account  An open account transaction is a sale where the goods are shipped and delivered before payment is due,  which in international sales is typically in 30, 60 or 90 days.  It is one of the most advantageous options to the importer in terms of cash flow and cost, but it is consequently one of the highest risk options for an exporter.
  6. 6. Open Account
  7. 7. Letters of credit  An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents.  The buyer establishes credit and pays his or her bank to render this service.
  8. 8. Letter of Credit Procedure
  9. 9. Letters of credit
  10. 10. Documents Against Payment (D/P)/ Sight Bill  In this method of payment,  the exporter ships the goods to his buyer and  sends his draft (bill of exchange) with the necessary export documents through his bank.  The exporter bank then sends the documents to the corresponding bank in buyer's country.
  11. 11. Documents Against Payment (D/P)/ Sight Bill  The bank of importer asks the importer to pay the draft & release the documents.  If the buyer pays the amount  then bank handover the documents to buyer and  if the buyer does not make the payment,  then bank will not handover the documents to buyer and exporter will suffer loss.
  12. 12. Documents Against Acceptance (D/A)/ Usance Bill/ Time Draft  This is the most unsecured method of payment in export trade.  In this method of payment exporter sends the documents to his buyer through his bank.  The buyer's bank handover the documents to the buyer only upon  acceptance which implies that he agrees to pay the amount of draft (bill of exchange)  after expiry of the period of credit (or usance period).
  13. 13. Documents Against Acceptance (D/A)/ Usance Bill/ Time Draft  The maximum usance period is for 180 days.  The disadvantage of Documents Against Acceptance (D/A) terms is that  It allows buyer to take delivery of the goods before making the payment.

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