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In today’s world, due to the spread of foreign trade between countries, trade has become a major concern for small businesses as well as large companies. As a result, it became necessary to establish procedures for the terms of delivery of goods in foreign trade and the terms of payment of the costs of delivered goods. Methods of payment in foreign trade are made under the conditions determined by the International Chamber of Commerce ICC.
Different types of means of payment are used in international trade, depending on the degree of trust between the importer and the exporter and the risks incurred by the parties. The most common of these payment methods, which depend on the contract and the will of the parties, are the following:
1. Cash payment/Prepayment/Prepayment/Payment before delivery
In prepayment, the importer pays the cost of the goods to the exporter before the goods are shipped. It is accepted in the doctrine that the cash flow that occurs before the shipment of the goods is a credit or an advance for the exporter. The exporter assumes no risk in the form of advance payment. Due to the existence of risks such as delay in shipment, goods not conforming to the order, all risks associated with this method of payment are the responsibility of the importer.
The prepayment process is as follows:
- A sales contract is concluded between the importer and the exporter.
- The importer deposits the contract price in advance through his own bank to be sent to the exporter.
- The export process begins with the transfer of the contract price to the exporter’s bank.
- The exporter delivers the goods to customs.
- In this process, documents related to the goods such as invoice, transport document, certificate of origin, insurance policy issued in favor of the importer are handed over to the exporter’s bank by the exporter. in order to be remitted to the importer through the intermediary of the importer’s bank.
- The importer clears the goods with the documents he received from his bank.
2. Cash for Goods
In the cash for goods method, the importer pays the price of the goods to the exporter after receiving the goods. Once the exporter has shipped the goods on behalf of the buyer, he sends the documents proving that he has delivered the goods to the importer directly or through the bank in free delivery. This is the mode of payment in which the exporter assumes the most risk.
The cash for goods payment process is as follows:
- A contract is established between the importer and the exporter.
- The exporter has the contracted goods shipped to the importing country. He also submits the necessary documents to his bank so that they can be given to the importer.
- The importer clears the goods with the said documents and possession and ownership of the goods pass to the importer.
- The importer pays the cost of the goods to the exporter’s bank through his bank.
3. Cash against documents / Documentary collections
This is the form of payment in which the importer pays the cost of the goods against the documents representing the goods. Once the exporter has shipped the goods in accordance with the signed sales contract with the importer, the shipping documents representing the goods are handed over to the importer through the bank for release against payment of the contract price. . Therefore, it is a very safe method in terms of receiving goods by checking them. However, if the importer does not accept the goods and make payment by not receiving the documents, the exporter will incur additional costs due to the return of the goods.
The cash against documents payment process is as follows:
- A sales contract is executed by and between the importer and the exporter.
- The goods are loaded on the ship to be sent to the country of the importer.
- In this process, the documents relating to the goods such as the invoice, the transport document, the certificate of origin, the insurance policy issued in favor of the importer are handed over to the exporter’s bank in order to be returned to the importer. It is important to include the phrase “against documents” in the documents sent.
- The importer’s bank notifies the importer of the documents proving ownership of the goods.
- The importer deposits the cost of the goods through their bank to be sent to the exporter’s bank.
- The importer clears the goods with the corresponding transport documents.
4. Acceptance Credit
It is a form of payment in which the payment of the price of the goods to be imported is left after a certain period after the shipment of the goods subject to an agreement to be concluded between the importer and the exporter. In the acceptance credit method, there is a policy or bond that guarantees payment of the price of the goods on a certain due date.
5. Letter of credit
The letter of credit method is possible, when the importer’s bank, according to the instructions of the importer, undertakes to make payment to the exporter up to a certain amount and for a certain period of deadline, in exchange for compliance with the required conditions and the presentation of the documents relating to the export of the goods exported by the exporter. Since the importer and the exporter are under the financial guarantee of a bank, the letter of credit method is the least risky for both the importer and the exporter.
Provided the exporter meets the terms of the letter of credit, it becomes certain that he will pay the export price. Since it is guaranteed that certain conditions will be met, the importer ensures that the goods are delivered according to the desired standards.
The L/C payment process is as follows:
- A contract is signed between the importer and the exporter. The contract should include details such as type, type, price, method of shipment, mode of sale, specifications, currency to be used for buying and selling the goods. In addition, whether the mode of payment is the letter of credit is decided either in the sales contract or by drawing up a separate letter of credit contract.
- The importer asks his own bank to open a letter of credit in favor of the exporter.
- The open letter of credit is sent to the exporter’s bank. The exporter is advised by the exporter’s bank. If the exporter accepts, the export process begins.
- Once the goods have been sent to the country of the importer, the documents relating to the goods such as the invoice, the transport document, the certificate of origin, an insurance policy issued in favor of the importer are handed over to the bank by the exporter. The exporter receives the cost of the goods from his bank in exchange for the shipping documents he has issued.
- The exporter’s bank sends these documents to the importer’s bank. The importer’s bank makes the payment to the exporter’s bank after verifying the accuracy of the documents.
- The importer’s bank then requests payment from the importer. Payment is made by adding a bank commission.
- After the importer’s bank collects the price of the goods from the importer, it hands over the documents to the importer.
- Once the importer has paid the price of the goods, he regains ownership of them through the bank.
- The importer clears the goods with the corresponding shipping documents.
6. Bank Payment Obligation (BPO)
This is an irrevocable and independent payment commitment given by the buyer’s bank to the seller’s bank, provided that the data of the exchange between the exporter and the importer, presented only in electronic form , are correctly matched. This payment method combines the letter of credit and cash for goods methods.
Knowing the variables affecting foreign trade will make it easier to determine the right method of payment. In foreign trade, mutual trust is important for both parties to establish an effective business relationship and for the established business relationship to be long-lasting. Indeed, in the cases of deposit, cash against goods and cash against documents, since the commercial risk for one of the parties prevails, it is important that the party bearing the risk has executed correctly the due diligence and take precautions accordingly. On the other hand, in the method of the letter of credit, the banks intervene as guarantors and secure the parties. For this reason, the letter of credit method is becoming more and more common in today’s foreign trade. In the letter of credit method, attempts have been made to prevent risk losses through banks. Banks also earn benefits by receiving commissions in exchange for the risk they take. In light of the above, the most widely used payment methods today are prepayment, cash for goods, cash for documents, and letter of credit. Payment methods such as acceptance credit, consignment payment, open account payment are not widely used today.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.