Method of Payment in Trade Finance

There are four method of payment used in trade business in day to day basis.

1.     Advance Payment

2.     Open Account

3.     Documentary Collection

4.     Letter of credit.

Advance Payment 

Is the least risky product for the seller, a cash advance requires payment to the exporter or seller before the goods or services have been shipped.

Cash advances are very common with lower value orders, and help provide exporters (sellers) with the upfront cash needed to ship the goods and no risk of late or no payment.

Open accounts

An open account is a transaction where the importer pays the exporter 30 – 90+ days after the goods have arrived from the exporter.

Documentary collection

Documentary collections is different from a Letter of Credit.

In the case of collection, the exporter will request payment by presenting its shipping and collection documents to its remitting bank.

The remitting bank then forwards these documents to the importer’s bank, which then pays the exporters bank, which will credit those funds to the exporter.

This is advantageous to the importer but carries substantial risk for the exporter – it often occurs if the relationship and trust between the two parties are strong.

Open accounts help increase competitiveness in export markets, and buyers often push for exporters and sellers to trade on open account terms.

As a result, exporters may seek export finance to fund working capital while waiting for the payment.

Letters of credit (LCs)

Letters of credit (LCs), also known as documentary credits, are financial, legally binding instruments, issued by banks or specialist trade finance institutions that pay the exporter on behalf of the buyer if the terms specified in the LC are fulfilled.

An LC requires an importer and an exporter, with an issuing bank and a confirming (or advising) bank.

The financiers and their creditworthiness are crucial for this type of trade finance: it is called credit enhancement – the issuing and confirming bank replaces the guarantee of payment from the importer and exporter.

In this section, and in most cases, we may consider the importer as the buyer and the exporter as the seller.

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Chandan Kumar Yadav
My name is Chandan Kumar Yadav CDCS, CSDG, CITF, PGDIBO,AML-KYC, CCFE, MLIBF, CSF, 6SIGMA a trade finance professional with an experience of 11 years whereas worked with several stages of letter of credit, bank guarantee and on other payments methods of trade transactions such as documentary collection, open accounts, SBLC etc., I have a fair understanding of Trade Based Money Laundering as well, Blogging related to Trade Finance is my passion and I want to share which I know and learn from others, I have worked with Wells Fargo, Yes Bank Limited and Bank of America, India which helped me to gain knowledge, view of Trade Finance and importance of International Trade in world's economy. Trade Finance is thumping product, everyday we are learning something new so in order to keep learning I started this as one of the platform. . Let's Learn Together

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