Free Online Course in International BusinessKnowledge StatementKnowledge of Methods of Payment: Letters of Credit, Documentary Collections, Cash in AdvanceGoalThe goal of this material is to introduce the methods of payment available to buyers and sellers conducting international transactions.Learning ObjectivesYou will be able to:• identify the methods of payment available for international transactions. • determine when to apply different methods of payment. IntroductionAn international manager needs to be able to describe methods and types of payment and the ways payments are communicated, both within and outside of the business organization. The application of these payment terms is critical to meeting both the business and collection goals of an organization.Cash in Advance/PrepaymentCCash in Advance/Prepayment occurs when a buyer sends payment in the agreed currency and through agreed method to a seller before the product is manufactured and/or shipped. Upon receipt of payment this seller then ships the goods and all the necessary shipping and commercial documents directly to the buyer.
Documentary CollectionsUsing a documentary collection process requires that a seller ship the product and create a negotiable document, usually a draft or bill of exchange. The draft and shipping documents are then processed either through a buyer's bank (the collecting bank) or through the seller and buyer's banks. Upon arrival at the buyer's bank, the buyer is notified to make payment; then the documents are released and used to clear the shipment through customs upon arrival. The primary advantage of documentary collections is that a seller who extends credit terms to a buyer under a D/A collection obtains an enforceable debt instrument in the form of a trade acceptance. The seller's rights to payment are protected under the negotiable instruments law of that buyer's country. In the event this buyer defaults or delays payment at maturity, the possession of the trade acceptance may put the seller in a stronger position before the court than if he/she had sold under open account, in which evidence of indebtedness is provided by the unpaid commercial invoice alone. In addition, a bank presenting a collection on behalf of a seller may obtain prompt payment from a buyer who might be inclined to delay payment if the seller were invoicing under open account.A documentary collection is best used for ocean shipments where original bills of lading are required. An original bill of lading is a document of title which enables a buyer to gain possession of the goods. When all the originals of a bill of lading are sent to the collecting bank, it is in the interest of the buyer to effect payment in order to obtain title to the goods. Documentary collections may be more competitive than letter of credit terms because they are less costly and do not require the buyer to tie up his/her local bank credit lines. There are a variety of terms associated with documentary collections that should be understood: • Buyer = Importer • Seller = Exporter • Remitting Bank = Exporter's Bank >> receives payment • Collecting Bank = Importer's Bank >> transmits funds from buyer to seller • Bill of Exchange/Draft - document issued by exporter and used for remittance of funds • Time/Usance Bill of Exchange - tenured at 30, 60, 90, 120 or 180 days, etc. There are four types of processes available to buyers and sellers: 1. D/P - Documents against Payment 2. D/A - Documents against Acceptance 3. Clean Collection 4. Cash Against Documents D/P - Documents against PaymentThe export documents and the bill of exchange provided to a collecting bank are only made available to an importer when payment is made. The collecting bank then transfers the funds to the seller through the remitting bank.
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