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Chapter 3 - Terms of Payment

An experienced exporting firm extends credit cautiously. It evaluates new customs with care and continuously monitors older account. Such a firm may wisely decide to decline a customer’s request for open account credit if the risk is too immense and propose instead payment on delivery terms through a documentary sight or irrevocable confirmed letter of credit or payment in advance. On the other hand, for a fully creditworthy customer the experienced exporter may decide to a month or two to pay, perhaps even one account.

Given below are the Terms of Payments Explained briefly:-

Advance Payment
Receiving payment by cash in advance of the shipment might seem ideal. In this situation, the exporter is relived of collection problem and has immediate use of the money. For the buyer however advance payment tends to create cash flow problem, as well as increase risk. When the buyer credit is doubtful or the political and economic environment of the country is unstable seller may demand advance payment, which will be to his advantage.

Documents Against Payment (D/P Basis)

The exporter makes shipment and sends the shipping documents to the exporter's bank for collection. The Bank then sends the shipping documents along with a collection letter to the importer's bank, which then sends a collection notice to the importer. The importer makes payment upon receiving the notice, and only after payment does the importer receive the original shipping documents with which you take the physical possession of the goods.

Documents Against Acceptance (D/A Basis)

Documents are released on acceptance of bill of exchange for deferred payment and payment will be collected on maturity date. It is a type of payment for goods in which the documents transferring title to the goods are not given to the buyer until he has accepted the draft issued against him.

Escrow
Escrow is an arrangement whereby money is delivered to a third party called an escrow agent to be held in trust in escrow pending the fulfillment of conditions in a contract, whereupon the escrow agent will deliver the payment to the proper recipient. Typically, escrow is used when the Buyer and Seller are unknown to each other. In an international trade context, after the Buyer and Seller have agreed to the transaction, the buyer puts the payment in escrow by paying the escrow agent, which both parties have agreed to use. The seller sends the shipment and upon acceptance by the buyer, the escrow agent releases the payment to the seller.

Letter Of Credit (L/C)

The Uniform Custom and Practice for Documentary Credit (UCPDC) are universally recognized set of guidelines governing Letter of Credit

A Letter of Credit is a payment term generally used for international sales transactions. It is basically a mechanism, which allows importers/buyers to offer secure terms of payment to exporters/sellers in which a bank (or more than one bank) gets involved. The technical term for Letter of credit is 'Documentary Credit'. At the very outset one must understand is that Letters of credit deal in documents, not goods. The idea in an international trade transaction is to shift the risk. Thus a LC (as it is commonly referred to) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer.

The Buyer is the Applicant and the Seller is the Beneficiary. The Bank that issues the LC is referred to as the Issuing Bank which is generally in the country of the Buyer. The Bank that Advises the LC to the Seller is called the Advising Bank which is generally in the country of the Seller.

The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame. Note that the Bank scrutinizes the 'documents' and not the 'goods' for making payment. The process works in favor of both the buyer and the seller.

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