METHODS OF
PAYMENTS
The volume of trade transactions is gradually increasing in
the international arena. To secure the international trade
payment is particularly very crucial. There are so many
factors that may affect the matter of securing payment for a
transaction. Where by buyers and sellers get to choose or
decide among the different method of payments on how
their transaction to take place on either on a domestic floor
or at an international level.
It is a legal agreement for exchange of goods, services or
property that are subject of exchange from seller to buyer
for an agreed upon value in money paid or the promise to
pay same.
It should be clearly stated and precise for both the seller
and the buyer.
Both the buyer and the seller require a knowledge of the
INCOTERMS – the International Chamber of Commerce .
1. Who is party to the contract?
2. The validity of the contracts.
3. The goods being sold.
4. The purchase price of the goods and the currency in question.
5. The terms of payment.
6. Inspection of the goods if required.
7. Where the goods should be delivered.
8. At what point transfer of title of the goods take place.
9. Any warranty or maintenance conditions associated with the
sale.
10. What supporting documentation and/or certificates are
required.
11. Who is responsible for paying import duties and other taxes.
12. Any contract performance security requirements.
13. What will happen if either of the parties defaults or cancels.
Cash in Advance
Documentary collection
Open account
Consignment
Other payments
Ways
Payment by
Wire Transfer Credit Cards
Cheque
Most secured and preferred cash in advance method.
An international wire transfer is commonly used and is
almost immediate. Exporters should provide clear
routing instructions to the importer when using this
method.
Especially a wire transfer, is the most secure and least
risky method of international trading for exporters and
consequently, the least secure and an unattractive
method for importers.
A variable Cash in advance method.
Exporters who sell directly to foreign buyers may select credit
cards as a viable cash-in-advance option, especially for small
consumer goods transactions. Exporters should check with
their credit card companies for specific rules on international
use of credit cards.
Although exporters must tolerate the fees charged by credit
card companies and assume the risk of unfounded disputes,
credit cards may help the business grow because of their
convenience and wide acceptance.
A less attractive cash in advance method.
Advance payment using a check drawn on the importer’s
account and mailed to the exporter will result in a lengthy
collection delay of several weeks to months.
Therefore, this method may defeat the original intention
of receiving payment before shipment. If the check is in a
foreign currency or drawn on a foreign bank, the collection
process can become more complicated and can
significantly delay the availability of fund.
The importer is a new customer and/or has a less-
established operating history.
The importer’s credit worthiness is doubtful,
unsatisfactory or unverifiable.
The political and commercial risk of the importer’s
home country are very high.
The exporter’s product is unique, not available
elsewhere, or in heavy demand.
The exporter operates on Internet-based business
where the acceptance of credit card payment is a must
to remain competitive.
Advantages Disadvantages
Safe and secure. May lead to loss of
No credit risk. customers.
Most desirable and
acceptable option.
Funds can be used for
business purposes
immediately.
Quick setup.
Perfect credit is not
needed.
Advantages Disadvantages
Inexpensive method. Not safe and secure.
Risk of non-delivery.
Least attractive.
Goods shipped not goods
ordered.
Delay in shipment.
Importer may change his mind.
Become insolvent.
May be unable or unwilling to make payment.
Trade policies may change resulting in a ban on import or
export of that item.
Payment is made on the mutually agreed future date,
usually 30-90 days. Thus known as time draft.
It also helps the importer to sell goods in the local
market and thus make payments to the exporter.
Riskier for the exporter.
Importer may refuse to make payment.
Credit worthiness of importer and his country’s economic
& political situation.
Exporter can also use date draft to cover his risk
Advantages Disadvantages
Has some measure of The exporter relies
control over documents entirely on the ability
and goods. and willingness of the
Less expensive than a importer to pay.
documentary credit. Control of goods is lost
Give considerable once the bill of exchange
payment warranty. has been accepted.
Advantages Disadvantages
A period of credit can be If the bill is accepted, the
obtained through the importer is legally liable.
use of a promissory note.
There is no guarantee
Exporter responsible for that the goods will be
the charges, normally.
received as ordered or on
Finance can be raised time.
using the goods as
security.
More convenient and
less expensive than L/C.
Features of Documentary Collections
• Exporter ships the goods to the importer but retains the title
of goods. It is less risky and complicated.
• He shall resent the documents to the remitting bank and
keep a close eye on the financial position of the importer and
his country’s political, economic, and regulatory
environment.
• Banks act as the facilitator. Exporters shall verify that the
negotiating bank may not grant any undue favor to the
importer in case of default.
• Such a mode of payment can only be used in case of an
established trade relationships between an importer and
exporter and in economically stable export markets.
Also called open credit.
Involves delivery of your goods or services to the buyer
with an invoice requesting payment at a certain time
after delivery.
The time given to the buyer to pay is called the credit
term.
Payment could be due in 14, 30 or 60 days.
Advantages Disadvantages
There is no guarantee of payment
The exporter incurs no and control if the goods are lost.
charges.
The exporter is exposed to political,
Increases market economic and country risks.
competitiveness. It is very difficult to control the cash
flow
There is a possibility that delays in
the banking system will delay the
transfer of funds.
When received, payment can be in
the form of foreign cheque that will
have to be negotiated causing
further delay.
Advantages Disadvantages
Retains control over the There is no control over
timing of settlement and the quality of the goods.
the method by which If special documents are
funds are remitted. required, there is no
Inspection of the goods guarantee that these will
before the payment is be received.
made.
Payments can be settled
on a monthly or
quarterly basis.
Under the consignment method, it’s the consignor
(seller) who supplies goods to the consignee (buyer).
The consignor produces or procures items for sale but
uses consignee facilities to display the wares and
handle the sales. The consignee doesn’t pay in advance
for the consignor’s goods. Instead, the consignee pays
the consignor after the sale and keeps a percentage of
the proceeds. The consignee can return unsold stock
to the consignor. The consignor is responsible for
delivering and removing stock.
Consignment payment method is useful if :
the consignee is reliable.
the consignee has a good credit history.
the consignee’s country has economic and political
stability.
the consignee is the branch office of the main
company.
Advantages Disadvantages
Cost savings Higher good return
Competitiveness Non-payment
Market Penetration Foreign exchange risk
Partnership
Advantages Disadvantages
Save on inventory costs Improves cash flow
Convenience Liability of goods
Cash
Debit
E-Wallet/Digital Wallet
Down Payment
Countertrade
Advantages Disadvantages
Widely accepted. Cash can be lost or
stolen when we carry it.
Fast and convenient. Coin are heavy to carry
around.
Have to exchange
currency when we visit
another country.
Cannot be used for
online transaction.
Advantages Disadvantages
Convenient to carry Lost card can be used by
around. anyone.
Quick and easy to use. Need to top up the card
whenever the stored
value run low.
Advantages Disadvantages
Time Saving Dependent on the
Security Devices
Track the Expenditure
Limited Merchants
Danger of Losing your
Money
It is a type of payment made during the onset of the
purchase of an expensive good or service.
The payment typically represents only a percentage of the
full purchase price.
Advantages Disadvantages
Allows buyers not to drain Lack of immediate equity
their savings.
Higher interest rates
Allows more buyers to buy
which in turn allows more Weakens negotiating
sellers to sell. power
It induces the exporter or There is a possibility that
seller to begin performance the seller or exporter may
without the importer or never deliver the goods
buyer paying the full even though it has the
agreed price in advance. buyer’s down payment.
There are 6 main variants of countertrade:
1. Barter.
2. Switch Trading.
3. Offset.
4. Counter purchase
5. Buyback.
6. Compensation Trade
Advantages Disadvantages
Allow importing country to Greater uncertainty on the
export products for which value of the goods being traded
market might not otherwise and uncertainty on the quality
exist of the goods.
Allow access to foreign markets the value of the deal—the
without necessarily setting up goods being exchanged, may
marketing companies be uncertain, causing
Gives access to market for significant price volatility.
companies that may otherwise Time-consuming
be closed to them
Things to consider when choosing a payment method:
Privacy
Service fees
Transaction costs
Risk of theft
Reliance on telecommunications and electrical
infrastructure
Each payment method has different advantages and
disadvantages. No one type of payment is best. The
best payment method depends on the needs of your
business.
When choosing payment methods, think about how
their advantages and disadvantages affect your
customers and your business operations.