Payment terms are very important aspects in the import export trade. In international trade there are different methods of making the payments. Let’s understand all methods one by one.
1. Advance Payment
When exports receive the payment first and ship the goods subsequently, it is called as advance payment. It is good for exporter as there is not any credit risk. But advance payment is rear; there are few situations when exporters have a chance to get advance payment. In following circumstances as exporter has the chance to get the advance payment:
a. Seller has monopoly of goods or there is scarcity of goods.
b. Order is very small and there is quick delivery of goods.
c. Goods are manufactured only for specific buyer- i.e. tailor made items.
d. Goods are sold in extremely low price.
e. Good reputation of seller and/or adverse reputation of buyer.
When exports receive the payment is required to make application to the banker for Foreign Inward Remittance certificate (FIRC). Purpose of remittance is mentioned on the FIRC.
2. Documents against payment
Under this payment method documents are handed over to the buyer from his bank. Banker first takes the payment from the buyer and then hand over the documents to the buyer. Then buyer can take delivery of the goods from the port.
When buyer does not make the payments; then he is not in position to take delivery of the goods. Exporter is safe to some extent in this payment method. But when buyer refuse to make the payment the exporter can call back the goods; but he has to bear extra cost transport from buyer country’s port to his port. Alternatively, exporter can find another buyer for the goods and sell the goods to alternate buyer after completing some port formalities.
3. Documents against acceptance
Whenever exporter wants to give or extend the credit to the importer; then he will draw the bill of exchange on D/A basis indicating the period of credit. Under this payment method the buyer gets documents upon his acceptance of “bill of exchange” to make the payment on due date.
The banker of the buyer will remit the amount to the exporter as soon as the same is received on due date. In case the buyer fails to make payment on due date the bank of buyer will not be held responsible. This is risky method of payment from the point of view of the exporter.
4. Letter of Credit
LC is the most modern, popular and secured method of the payment for the exporter. This is most reliable method of obtaining payment of the exporters. Under this method banker guarantees the payment to the exporter on behalf of the importer.