terms of payment

In an international trade, It's essential to agree with the other person how is he going to pay you for the goods, after all the majority of the trade operations are not payed in cash at the moment of the sell; that's why there are some instruments used for the payment of these "debts". They are:

• letter of credit: it's a document requested by the importer to his bank, so it serves as a guarantee that the goods will be payed to the exporter; these kind of documents are used in almost every country of the world and gives a very low risk rate to the exporter.

• open account: an open account is a method where the exporter deliver the goods before the payment is made; normally expecting a payment from the importer between 30 and 90 days after the delivery. This kind of method is only recommended when you know the other person because the risk of losing the goods is prettty high

• cash in advance: in this method the buyer pays to the seller before the products are even shiped, that means that the buyer "completly relies on the seller to ship exactly the goods expected, as quoted and ordered"1

• documentary collection: used when the buyer can't pay for the goods in the trade moment; with this method the seller gives a document to the buyer that is used as a guaranty for the payment; normally the document is supported by a bank, that is called the remitting bank; and the docs are received by the buyer's bank, also called the presenting bank. The documentary collection can be: a sight draft or a time draft. The most used is the sight draft and it goes as it's shown in the next graphic:

1. the buyer (drawee) and the seller (drawer) negotiate the transaction
2. the seller ships the goods
3. the seller signs a draft doc and gives all the documents to the remitting bank
4. the remitting bank gives the documents to the presenting bank
5. the presenting bank tells to the buyer that he has recieved all the documents
6. the presenting bank holds the documents until the payment is done.
7. the buyer pays for the supplied goods
8. the presenting bank gives the documents to the buyer 2

Althought there're other terms of payment, these are the most used in the international trade so the knowledge of them is a must for any exporter or importer.



1. took from: http://www.foreign-trade.com/reference/payment.cfm
2. took from: http://www.export61.com.au/international-payments.asp#16