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Methods and Tools of Payment
in Exporting and Importing
The process of exporting is incomplete without receipt of payment. Export income is considered earned only when payment has been received.
- Letter of Credit (L/C)
- The most popular and a safer method of payment is by a confirmed irrevocable letter of credit at sight. Please see Documentary Credits (Letters of Credit) for detail explanations.
- Documentary Collections
- Please click here for the detail information about documentary collections.
- Cheque and Bank Draft
- In exporting to the offshore countries, payment by cheque and bank draft occur more often in a small order, ranging from a few hundred to a couple of thousand U.S. dollars. Cheques and bank drafts are often used in open account and consignment trade arrangements.
Both large and small companies may default in their payments, regardless of the amount involved. In times of economic uncertainty, both large and small companies may go out of business. It is important to receive the cheque or bank draft before releasing the shipment. Unless the integrity of the importer is known, it is very important to wait until the cheque or bank draft has cleared before the shipment. International clearing of cheques and bank drafts takes 3 to 4 weeks usually (except in a sight draft with a paying bank in the seller's country).
Not all cheques and bank drafts are genuine, and not all genuine cheques carry a cash value (please refer to the Fly-By-Night Importers for related information).
Trade Arrangements Using the Cheque and Bank Draft
In an open account trade arrangement, the goods are shipped to a buyer without guarantee of payment. Quite often, the buyer does not pay on the agreed time. Unless the buyer's integrity is unquestionable, this trade arrangement is risky to the seller.
ConsignmentIn a consignment trade arrangement, the seller ships the goods to the buyer when there is no purchase made. The buyer is obliged to pay the seller for the goods when sold. The seller retains title to the goods until the buyer has sold them.
Cash In Advance (CID)The cash in advance, which is the safest term of payment, most often is effected using the cheque or bank draft. In some cases, the CID term is paid using the telegraphic transfer (T/T).
- Telegraphic Transfer (T/T)
- The telegraphic transfer---cable transfer or wire transfer---is the equivalent of a cash payment that can be credited directly to the seller's account (the name and address of the seller's bank and the seller's bank account number are required by the buyer's bank). It is fast and safe. Unlike a payment by cheque or bank draft, in which the mailing time alone may take several days to few weeks, plus the clearing time of 3 to 4 weeks for a total of about 4 to 6 weeks before the seller may receive the cash, by means of T/T the seller may receive the cash in a few hours or days.
It is important to wait until the T/T has been received before making the shipment, especially when the integrity of the buyer is unknown.
- Combination of Letter of Credit and Telegraphic Transfer
Case Sample: Hostage in Payment |
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