Free Online Course in International BusinessKnowledge Statement Knowledge of Methods of Payment: Letters of Credit, Documentary Collections, Cash in AdvanceGoalThe goal of this material is to introduce you to the methods of payment available for international transactions and the risks to buyers and sellers for each method of payment.Learning ObjectivesYou will be able to• identify the methods of payment available for international transactions. • identify the risks to a buyer associated with each method of payment. • identify the risks to a seller associated with each method of payment. IntroductionThe uncertainty of international sales reinforces the earlier discussion regarding sources of credit information. A significant reason for obtaining and effectively utilizing sources of information is to make the best decision for a seller as far as what payment terms are most appropriate, payment terms that minimize risk while allowing a seller to be competitive in the market place. Each of these payment terms can be measured by levels of risk, and an international credit manager needs to be in a position to understand and describe these methods of payments. The concept of extending credit in the international environment requires than an international credit manager learn methods for mitigating payment risks for the organization. One way to do so is with different methods of payment. There are a variety of payment methods available for international transactions. Some companies, who are new to selling in overseas markets, believe that the letter of credit or some type of secured transaction is the “best” (or only) way to transact business when selling offshore. However, a pro-active international credit manager recognizes that in an attempt to obtain new business, many different payment terms are important in a competitive business environment. The ways these terms apply as they relate to a seller’s risk of receiving payment from a buyer are examined in this lesson.Methods of PaymentMethods of payment include the following:• open account • documentary collections • documents against acceptance • documents against payment • letter of credit • confirmed letter of credit • advised letter of credit • cash in advance Open AccountA seller ships the goods and all the necessary shipping and commercial documents directly to a buyer. This buyer agrees to pay the seller’s invoice at a future date ( net 15 days, net 30 days or with a discount offered--for example, 1% if paid within 20 days of invoice date).Documents against Acceptance (DA)A buyer is required to "accept" a seller’s time draft, thus acknowledging obligation to pay at the specific future date. The time of payment occurs at maturity of an accepted time draft, 30, 60 or 90 days after date of acceptance or date of bill of lading.Documents against Payment (DP)A buyer is required to pay a seller’s sight draft in order to obtain shipping documents. Payment is made on presentation of the sight draft by a bank to the buyer, usually one or two weeks after shipment. Under D/P terms, the seller, through a bank acting as an agent, is able to retain control of the goods until the buyer pays. Under certain circumstances, such as to meet legal requirements of the importing country or to obtain a government permit for foreign exchange, the buyer will require possession of the documents before payment. The seller should inquire as to the practice in specific countries. Air shipments are often made under documentary bill collections. The buyer, as direct consignee of the non-negotiable air waybill, will be able to take possession of the goods before meeting his/her payment obligations.
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