v  Factors determine payment method

-          Relationship between seller and buyer

-          Nature of the merchandise

-          Industrial norms: ex: oil industry – advance

-          Political and economic stability in either or both countries

v  Advance payment

              Purpose

-          The buyer trust the seller

-          The buyer wish to build a long term trade relationship with the seller

-          The seller has unique or high-demand products

-          Big order, the seller need finance

-          Safe for the seller if the seller worry about the risks in country of import

Risks to buyer

-          Creditworthiness and reputation of the seller

-          Trasportation risk

-          If seller doesnot ship the goods, buyer’s last resort is to take action on basis of the sales contract

Risk to seller

-          Perpare to ship goods but still no payment received

v  Collection payment

Features

-          The banks handle the documents as per instruction of the seller

-          Bank donot undertake any payment but act only as collectors of payment

v  Documentary credits

Features

-          The issuing bank undertake payment

-          The banks deal only with document rather than the goods

-          Provide equal security to both buyer and seller

-          The most common method in international trade

v  Open account

Features

-          Simple, low cost

-          Buyer and seller highly trust each other

-          Nomally used when goods are shipped to a foreign branch or subsidiary

Adv. To buyer

-          Have time to receive goods, sell them in domestic market, receive payment before paying to the seller

-          Safe for the buyer as he can examine the goods before payment

Risks to seller

-          Credit risk from the buyer

-          Increase cost of credit control

-          If buyer doesnot pay, seller’s last resort is to take action on basis of sales contract

Risks to buyer

-          No assurance of shipment

-          Invoice may be different from actual shipment