Methods of Payment      

1). Payment in Advance (Cash in Advance- CIA)

 

Time of payment:  Before Shipment

 

Goods Available to buyer: After Payment

 

Risk to Exporter: None

 

Risk to Importer:              Completely relies on exporter to ship goods as ordered. 

                                    Reputation check of exporter very important.

 

Payment in advance is the exporter's most advantageous payment method, since it eliminates all concerns about collection and allows the exporter advance use of the money.  On the other hand, advance payment creates cash flow problems and increases risk for the buyer.

 

2).  Open Account

 

Time of Payment:             As Agreed between U.S. Importer and overseas seller.

 

Goods available to importer:            Before payment.

 

Risk to overseas seller:            Relies completely on the U.S. buyer to pay as agreed

                                                upon.  Credit check of buyer is important.

 

Risk to U.S. Importer:                      None

 

Open account is an unsecured extension of credit with no distinction between domestic and overseas operations.  This payment term is used between well-established relationship between overseas suppliers and U.S. importers.  The supplier's capital is tied up until payment is  made, which is usually after the merchandise is received in the U.S., inspected, and accepted as conforming to the contract.

 

3).  Documentary Collection

 

a)  Sight Draft (D/P - Documents against payment)

 

Time of payment:            On presentation of draft to U.S. Importer

 

Goods available to importer:              After payment

 

Risk to overseas supplier:            If the draft is unpaid, the exporter must                                                 dispose of the goods.

 

Risk to U.S. importer:            Assured the shipment is made, but importer relies on                                     the supplier to ship the goods described in the

                                    documents.

 

The U.S. importer does not receive the documents, and therefore gain possession of the goods, until payment is made to the collecting bank.  The overseas supplier retains title and control of the shipment until it reaches its destination in the U.S. and payment is made.  This shipment has to be made on a negotiable bill of lading that is given to the overseas shipper, endorsed by that shipper, and sent to the U.S. importer's bank or another intermediary accompany by a sight draft, invoices and other  necessary documents to enable U.S. Customs clearance and release by the U.S. steamship agent / line.

 

b) Time / Date Draft (D/A - Documents against acceptance)

 

Time of  payment:              On maturity of draft

 

Goods available to U.S. Importer:             Before payment of the draft

 

Risk to overseas supplier:            Relies on U.S. importer to pay draft. If draft

                                                is not paid, the goods cannot be disposed of if the U.S. buyer took                                                 possession of the goods upon acceptance of the draft.

 

Risk to U.S. Importer:            The importer is assured the shipment is made, but

                                    relies on the supplier to ship the goods described in

                                    the documents.

 

If the overseas supplier wants to extend  credit to the U.S. importer, a time or date draft can be used to state that payment is due within a certain time after the U.S. Importer accepts the draft AND receives the goods.  By signing and writing "accepted" on the draft, the U.S. importer is formally obligated to pay in the stated time (Time draft).

 

4)  Letter of Credit (L/C)

 

This is the credit instrument issued by the U.S. importer's bank to the overseas supplier's bank or a correspondent bank which guarantees payment upon meeting certain conditions within a specified period of time.  Effectively, it allows an overseas supplier to convert documents to cash as soon as possible after shipment.

 

.... As with Documentary Collections, payment under L/Cs is made either on a "Sight" or a "Time" draft terms....

                                   

                                    Sight Draft                        Time Draft

Time of  Payment            When shipment made            When acceptance matures           

 

Goods available to

U.S. Importer                        After payment                        After document acceptance

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Risk to overseas supplier:            Very little or none dependent upon credit                                                 terms

 

Risk to U.S. Importer:            Assured shipment is made, but relies on supplier to ship goods described in the documents

 

The irrevocable credit is the best assurance both the buyer and seller have of  reducing their risks in the transaction.  The U.S. buyer is assured he will obtain the goods following payment and the overseas supplier is assured of gaining payment for the goods (as long as the banks do not default) if he complies with the terms and conditions of the L/C.