2. Methods of payment in International
Business
There are five major types of payment used by
businesses engaged in international trade :
• Documentary Collections
• Letters of Credit
• Cash against Documents
• Open Account Trade
• Consignment
3. 1. Documentary Collections
• This is a method of payment used in international trade
where the buyer’s bank, after receiving the seller’s invoice,
sends to its correspondent bank an irrevocable documentary
collection order for collection against the buyer.
• It is also called a Documentary Letter of Credit. This is a letter
from a bank, known as the issuing or confirming bank, i.e., the
bank that issues the document to an exporter in a foreign
country at his request, or confirms it when issued by another
bank for presentation abroad.
4. 2. Letters of Credit
• A letter of credit (LC) or documentary credit is one of the
most popular payment methods in international trade. It is
an undertaking by a bank to pay the beneficiary (the seller),
upon presentation of certain documents against
acceptance by the bank of those documents. A Letter of
Credit is used most often as the payment method for
international trade.
• Letter of Credits are irrevocable and must be confirmed.
The exporter makes arrangements with their own bank
who then contacts one or more banks in the country where
they want to export.
• The bank(s) abroad will appoint another correspondent, an
advising bank to advise them on whether they should issue
the Letter of Credit, and what its terms should be.
5. 3. Cash against Documents
• This means that payment for goods sold is made after
they are shipped according to shipping documents seen
by both parties.
• Such transactions are usually very large because it is
more convenient for importers to pay for goods when
they actually arrive at their destination rather than wait
until they have been sold in their country of destination.
• Import duties are usually paid in cash against documents
transactions. An open account transaction is when goods
are shipped without the use of documentary letters of
credit or other irrevocable payment arrangements.
6. 4. Cash In Advance
• One party pays another party only after the
goods have been shipped and all documents
have been released from custody by an
independent inspector. Payment is issued by
check before the shipment arrives at its
destination, making this method more
expensive for importers because it requires
that they pay for shipping costs upfront as
well as import duties paid to foreign
governments.
7. 5. Open Account Trade
• In open account trade, an exporter will send goods to a
foreign customer, but the customer is not required to pay for
them immediately when they arrive. Instead, the exporter will
wait until the goods have been sold and the proceeds show
up in his bank account before demanding payment from his or
her foreign customer. The foreign customer can then make
whatever arrangements he or she wants with its bank or
financial institution to make payment for the goods.
• Open Account transactions are usually used extensively by
countries that depend heavily on exports like oil-rich nations.
It is also common in certain other areas such as outfitting and
service businesses (especially engineering and firms) that
receive their payment directly in the form of a letter of credit
or documentary collection.
