Describe the Main Payment Methods in International Trade

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The Answer is To protect their own interests in international trade, exporters prefer cash in advance, i.e., receiving payment before shipment or delivery of goods. Especially when dealing with an unfamiliar buyer or a buyer with shaky credit, cash in advance can avoid potential default risk. Also, if a seller needs significant investment to fulfill an order, it may demand certain prepayment.
Importers tend to favor methods that allow payment after shipment. An open account is an arrangement in which the exporter ships goods first and bills the importer later. Consignment is a variant of an open account in which the exporter gets paid after its foreign distributor has sold goods to the end buyer. Sales on an open account offers flexible payment dates and credit terms to the buyer.
A more widely accepted payment method is letter of credit (or L/C). The letter of credit is a promise made by a bank on behalf of the buyer that the bank will honor the payment obligation if the seller presents the documents specified in the L/C. L/C involves one or more banks as the intermediary, thus mitigating the lack-of-trust problem between importers and exporters. The exporter is guaranteed payment under conditions set forth in the L/C. For the importer, payment is made only after the presented documents meet the requirements. The issuing bank actually lends credit to the importer by assuming the payment commitment. It charges a fee for L/C, which is relatively expensive compared to other payment methods.
A draft, also known as the bill of exchange, is a written order by one party (the drawer or maker) to another party (the drawee) to make a certain amount of payment to the exporter or designated beneficiary. It can be payable upon presentation (a sight draft) or on a specified future date (a time draft). The drawee accepts a draft by signing it, thus converting it into a binding contract and negotiable instrument. This instrument can be used with or without L/C. When L/C is not used, the drawee is the importer. When L/C is used, the drawee is the issuing bank of the L/C.

Describe the Main Payment Methods in International Trade

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Describe the Main Payment Methods in International Trade

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Correct Answer:VerifiedShow Answer

Correct Answer:
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