Comparison of Payment Methods
Four key ways to make payments
The main difference between these payment methods is the level of risk faced by the importer and exporter:
Payment in Advance – before goods are shipped
Open Account Payment – after goods are shipped or received
Documentary Credits – payment is guaranteed by a bank subject to the fulfilment of certain terms and conditions by the importer and exporter
Documentary Collections – payment is handled by banks acting as agents for the importer and exporter
Quick Guide to choosing a Payment Method
Payment in Advance | Documentary Credit | Documentary Collection | Open Account Payment | |
|---|---|---|---|---|
Bank Charges | Low | High | Medium | Low |
Payment Risk | Exporter has concerns over the ability and willingness of importer to pay | Payment is guaranteed by issuing bank if terms of credit are met | Payment risk unchanged but mitigated by control over goods | Exporter is comfortable with the reliability of the importer to pay |
Country Risk | High Exporter requires payment before shipment | High Exporter requires confirmation from a bank in a low risk country | Medium Exporter mitigates risk by using the banking system to retain control over the goods by holding on to title documents | Low Does not mitigate country risk in any way |
Credit Facilities | Not required | Required | Not required | Not required |
CashFlow | Importer has a good cash position Exporter needs cash as early as possible | Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay | Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay | Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay |
Price | Importer may be able to negotiate a discount | Price may be lower in exchange for added security of bank guarantee | Effect on price depends on collection terms | Importer may pay a premium for supplier credit |
Disclaimer:
Global Trade Solutions transactions may be subject to credit approval. Other restrictions, including specific country regulations, may apply. Foreign currency exchange rates may apply to certain trade transactions.
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