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Payment Methods: Open Account

Payment methods in international trade involve risks that exporters must consider, including the importer's creditworthiness and country economic conditions. Banks play a vital role by facilitating payments and providing guarantees. Common payment options include open accounts, bank transfers, documentary collections using documents against payment or acceptance, and letters of credit which provide banks guarantee payment if terms are met. Each method balances risks between exporter and importer differently.

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Katia Gonchar
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215 views3 pages

Payment Methods: Open Account

Payment methods in international trade involve risks that exporters must consider, including the importer's creditworthiness and country economic conditions. Banks play a vital role by facilitating payments and providing guarantees. Common payment options include open accounts, bank transfers, documentary collections using documents against payment or acceptance, and letters of credit which provide banks guarantee payment if terms are met. Each method balances risks between exporter and importer differently.

Uploaded by

Katia Gonchar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PAYMENT METHODS

When choosing payment methods exporters have to take into account a number of factors
because several risks are involved in international trade. These include:

 The importer’s credit standing


 The country in which he operates ( its economic and political situation , its market and local
trading conditions)
 The degree of trust the seller has in him

Ideally:

The importer would prefer to delay payment at least until the goods have been received

The exporter would like payment as soon as an order has been placed

In International trade transactions banks play a vital role : they can be intermediaries of payment
or even guarantees of payment.

An open account transaction is a sale where


the goods are shipped and delivered
before payment is due, which is usually
in 30 to 90 days. Obviously, this option
Open is the most advantageous option to the
importer in terms of cash flow and cost,
Account but it is consequently the highest risk
option for an exporter.

For this reason this term is usually granted


to regular, reliable customers.
A bank transfer is the most common and the
fastest system for International payments.
The importer instructs his bank to transfer an
amount of money to the exporter’s bank. If
Bank Transfer the payment is urgent, swift transfers can be
arranged. SWIFT (Society for Worldwide
Interbank Financial Telecommunications) , a
fast telematic system for inter-bank transfers,
allows same day transfers between banks
linked to the system.

When shipping documents are required , the method of


payment is known as Documentary collection. For this
payment method the exporter draws a B/E, which has to
be signed and accepted by the importer before any
goods are sent. Once the goods have been dispatched,
the exporter sends the B/E plus all the relevant shipping
documents to his bank. The exporter’s bank forwards the
shipping documents to the importer’s bank when the B/E
has been paid ( D/P) or payment has been guaranteed
at a later stage (D/A)

Documents against Payment (D/P):The exporter sends the shipping


documents to his bank with an order to forward them to the buyer’s
bank only when the B/E has been paid.
Documentary D Documents against Acceptance (D/A):The exporter’s bank sends the
collection B/L and the other shipping documents to the importer’s bank when
the B/E has been signed for acceptance and the goods dispatched.
The importer’s bank then gives the documents to the buyer who
becomes the official owner of the goods

D/Cs should only be used under the following conditions:

 The exporter and importer have a well-established


relationship.
 The exporter is confident that the importing country is
politically and economically stable.
 An open account sale is considered too risky, and an LC is
unacceptable to the importer.
A letter of credit is a letter from a bank guaranteeing
that a buyer’s payment will be received on time and for
the correct amount. If the buyer is then unable to pay
for the purchase, the bank has to cover the payment.
The letter of credit specifies all the terms of trade
involved in the transaction: a detailed description of the
goods, the time and place of delivery, the
documentation required, etc. When these sales terms
have been met and the documents have been
submitted to the importer’s bank, the credit is released
and the supplier is paid. This method of payment is
secure for both the importer and the exporter because
the banks involved have to check the documents
carefully and then make payments in accordance with
the terms specified in the L/C.
Documentary letter A confirmed irrevocable letter of credit gives the
of credit (L/C) maximum protection. This is because the buyer cannot
cancel it without the exporter’s permission. It is
especially useful in high risk markets where payments
might be restricted by events such as economic crisis or
military action.

A basic L/C transaction involves four parties:

•the importer (applicant)

•the importer’s bank (the issuing bank)

•the exporter (beneficiary)

•the exporter’s bank (the advising bank)

As this method has high bank costs, it is not suitable for


small sums.

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