Methods Of Payment In International Trade - International Trade & Investment

In today's world, as a result of the spread of foreign trade between countries, trade is now the focus of small-scale companies as well as large-scale companies. As a result of this, it has become necessary to establish procedures for the delivery terms of goods in foreign trade and the payment terms of the costs of the delivered goods. Payment methods in foreign trade are made in the terms determined by the ICC International Chamber of Commerce.

Different types of payment methods are used in international trade, depending on the degree of trust between the importer and the exporter and the risks undertaken by the parties. The most common of these payment methods, which depend on the contract and will of the parties, are as follows:

1. Cash Payment / Advance Payment / Prepayment / Cash Before Delivery

In advance payment, the importer pays the cost of the goods to the exporter before the goods are shipped. It is an accepted view in the doctrine that the cash flow that occurs before the goods are sent is a credit or an advance for the exporter. The exporter does not assume any 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 risk in this form of payment is on the importer.

The advance payment process is as follows:

A sales contract is made between the Importer and the Exporter.
The importer deposits the contract price in advance through its 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 the 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 delivered to the exporter's bank by the exporter in order to be delivered to the importer through the importer's bank.
The importer clears the goods from its customs with the documents it received from its bank.

2. Cash Against Goods

In the cash against goods method, the importer pays the price of the goods to the exporter after receiving the goods. After the exporter has shipped the goods on behalf of the buyer, it sends the documents proving that it has delivered the goods to the importer directly or through the bank as free delivery. This is the payment method in which the exporter assumes the most risk.

The cash against 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. It also delivers the relevant documents to its bank in order to be delivered to the importer.
The importer clears the goods from customs with the said documents and the possession and ownership of the goods pass to the importer.
The importer pays the cost of goods to the Exporter's bank through its 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. After the exporter has shipped the goods in accordance with the sales contract executed with the importer, the shipping documents representing the goods are delivered to the importer through the bank to be delivered against the delivery of the contract price. Therefore, it is a very safe method in terms of receiving the goods by controlling the same. However, if the importer does not accept the goods and does not make the payment by not receiving the documents, the exporter will incur additional costs due to returning 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 onto the ship to be sent to the importer's country.
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 delivered to the exporter's bank in order to be delivered to the importer. It is important to write the phrase "against documents" in the documents sent.
The importer's bank notifies the importer of documents showing ownership of the goods.
The importer deposits the cost of goods through its bank to be sent to the exporter's bank.
The importer clears the goods from customs with the related transport documents.

4. Acceptance Credit

This is a form of payment in which the payment of the price of the goods to be imported is left after a certain period of time after the shipment of the goods subject to an agreement to be made 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 at a certain maturity.

5. Letter of Credit

Letter of Credit method is possible, where 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 maturity period, in return for the fulfillment of the required conditions and the presentation of documents relating to the export of the goods exported by the exporter. Since the importer and 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 that the exporter fulfills the letter of credit terms, it becomes certain that the exporter will pay the export price. Since it is guaranteed that certain conditions will be met, the importer ensures that the goods are delivered under the desired standards.

The L/C payment process is as follows:

A contract is executed between the Importer and the Exporter. The contract should include details such as the kind, type, price, shipping method, mode of sale, features, currency to be used in the purchase and sale of the goods. In addition, whether the payment method will be the letter of credit is decided either in the sales contract or by making a separate letter of credit contract.
The importer instructs its own bank to open a letter of credit in favor of the exporter.
The opened letter of credit is sent to the bank of the exporter. The exporter is notified by the exporter's bank. If the exporter accepts, the export process begins.
After the goods are sent to the importer's country, documents related to the goods such as invoice, transport document, certificate of origin, an insurance policy issued in favor of the importer are delivered to the bank by the exporter. The exporter receives the cost of the goods from its bank in return for the shipping documents it has delivered.
The exporter's bank sends the said documents to the importer's bank. The importer's bank makes the payment to the exporter's bank after checking the accuracy of the documents.
The importer's bank then requests payment from the importer. Payment is made by adding bank commission.
After the importer's bank collects the price of the goods from the importer, it delivers the documents to the importer.
After the importer pays the price of the goods, it takes over the ownership through the bank.
The importer clears the goods from customs with the related 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 successfully matched. This payment method combines the Letter of Credit and cash against goods methods.

CONCLUSION

Knowing the variables affecting foreign trade will facilitate the determination of the right payment method. In foreign trade, mutual trust is important for both parties to establish an effective commercial relationship and for the established commercial relationship to be sustainable. As a matter of fact, in cases of advance payment, cash against goods, and cash against documents, since the commercial risk on one of the parties outweighs, it is important that the party bearing the risk performed the due diligence work correctly and takes its precautions accordingly. On the other hand, in the letter of credit method, 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, it has been tried to prevent the losses caused by the risks through banks. Banks also gain benefits by receiving commissions in return for the risk they undertake. In the light of the above, the most widely used payment methods today are advance payment, cash against goods, cash against documents, and letter of credit. Payment methods such as acceptance credit, payment by consignment, open account payment are not widely used today.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Turkey: Methods Of Payment In International Trade