Importing and Exporting: Methods of Payment

The most popular methods of payment are in international trade are:

• Open account

• Documents against acceptance

• Documents against payment

• Letter of Credit – документальный аккредитив

• Prepayment

For exporters, prepayment seems to be the roost preferable method of payment, for in this situation his risk is minimal. For importers, the situation is just the opposite. Since the interests of the parties are contradictory, methods of payments are usually the results of rather long and difficult negotiations.

An open account implies that the exporter sends goods to the buyer and after doing that or at the end of a certain period agreed upon in a supply contract, sends the buyer an invoice. This method of payment is cheap, but it's rather risky for the exporter who hasn't got any protection, but the importer's promise, honesty and reputation. This method of payment is preferable when a transaction is performed between affiliated companies, since such companies do not have any grounds to doubt each other’s reliability.

Small exporters are often asked to conclude an open account transaction. If asked for that, they should decide very, carefully whether their partner is creditworthy.

Documents against acceptance

Documents against payment

In both these payments documentary drafts are used. These methods of payment are known to be rather risky for the exporters. They imply that the exporter agrees to sell his goods and to ship them without getting money first. His bank prepares a draft and sends it to the importer's bank. The importer's bank informs the importer that such, document has been received. Under ideal circumstances, an honest importer signs the draft and returns it to his bank. The bank withdraws the money from the importer's account and transfers it to the exporter's bank account in the exporter's bank.

The first time you see the draft sent to you by your bank is called first presentation. When you sign the draft you also write the word "accepted". This action is blown as 'acceptance of the draft'. If you are presented a 'sight draft', that means that you have to pay as soon as you see it. If you are presented a 'time draft’ that means that you can pay without, a certain period of time (up to 180 days) after the sight or after the date of the draft.

To protect themselves, some, exporters try to arrange things in such a way that the importer can not get hold of the shipped goods until he accepts the draft. The exporter places his goods on a ship (or on a plane) and the ship's captain or his mate gives the exporter a document called 'a bill of lading' (an 'airway bill', if the goods are transported, by plane). Without this document the buyer can not claim the merchandize.

In case of a sight draft, both the exporter and the importer bear the risk. The buyer might refuse to pay or to accept the draft and refuse to claim the goods. He might have changed his mind, lost his business or might have received a better offer from a competitive company. The buyer is also in a vulnerable position because he has already paid the money but the merchandize he receives might not be the one he has ordered. The time draft lessens his risks.

Letter of Credit (commercial documentary letter of credit) is widely used in international trade. 'Commercial' here means that it is used in a business deal and 'documentary' means that it is payable upon presentation of specified documents. The abbreviation LC stands for 'Letter of Credit'. If this term of payment is agreed upon, the importer applies for LC from his bank. He fills out a form indicating the type of credit (revocable/irrevocable), the be­neficiary, the amount, the documents involved (bill of lading, invoice, insurance, etc.), a brief description of the goods covered by the credit. The money will be credited to the exporter's account as soon as confirmation of shipment is made. In the end the importer's bank sends the documents the importer, so that the importer can claim the goods.