What are the Methods of Payments in International Trade?



Payments in International Trade may involve some of the methods discussed in Home Trade. Basically there are four major methods of payment:
Cash in Advance
Open Account
Drafts(Bill of Exchange
Letters of Credit
Cash in Advance: This involves payment for goods in which the price is paid in full before shipment is made. It is advantageous to the exporter because the importer is financing the entire transaction and there is no risk to the exporter. Cash in advance is possible when:
The credit worthiness of the importer is poor.
If political atmosphere is not stable
If demand exceeds supply.

Open Account: This is when credit is extended by a business(exporter) to a customer(importer). An exporter keeps on sending the goods but the importer is not required to pay for them immediately. Open Account payment is possible when;
Both parties are known to each other 
Relationship between exporter and importer has existed for a very long time.
Importer’s credit position is sound. 
There are no complicated and restrictive foreign exchange regulations imposed by the importing country

Drafts (Bill of Exchange): There exist 3 broad types of drafts;
Sight draft:A sight draft means the importer must pay immediately when the draft is presented to him. There is no credit period. The exporter submits this document (together with all other important documents) during export (e.g. Bill of lading) to the exporter’s bank in his own country. The bank then forwards this document to the importer’s bank in a foreign country but with some instruction that will make an importer pay before the documents are issued.
                   Time draft: This is where the exporter gives the importer a credit period. The documents are handed over against acceptance of draft. The importer signs the draft by inserting the words ‘Accepted’ in it. The documents are therefore handled over and payments made later by the importer.
                   Clean Draft: In this case the exporter sends the shipping documents directly to the importer but sends the draft to his bank for collection. This method is somewhat disadvantageous to the exporter because the exporter gives title and physical control of goods irrespective of whether the importer has accepted the draft or not.

Letters of Credit: Is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorizing another  bank to issue payments to the exporter  under special conditions, example presentation of specified shipping documents.







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