Payment Methods
There are many ways to make and receive payment in international trade. Due to the physical distances between buyer and seller, and the fact that the transaction may have taken place without the two parties actually meeting, minimizing exposure to risk is on the minds of both parties. The buyer wants to make sure they receive their order in acceptable condition and on time, and the seller needs to know they will get paid for it. Below is a table of the common payment methods:
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Payment
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Details
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Allocation of Risk
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| TT or Cash Advance |
T/T is the easiest payment form and is typically used when samples or small quantity shipments are transported by air.
T/T is also used between buyers and sellers who have already established a mutual trust, as this negates the risks associated with this, the fastest and cheapest form of payment.
Documents like air waybills, commercial invoices and packing lists will be sent to you along with the shipment in the same aircraft.
As soon as the shipment arrives, you, with documentation, can clear the customs and pick up the goods. Shipping happens only after money is safely in seller's bank account.
It usually takes 3-4 days for such a wire transfer anywhere in the world.
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100% buyer risk |
| Letter of Credit (L/C) |
The L/C is a guarantee, given by the buyer's bank, that they will pay for the goods exported, provided that the exporter can provide a given set of documents in accordance with clauses specified in the L/C and in a timely manner.
The technical term for letter of credit is "Documentary Credit."
Letters of credit deal in documents, not goods. Thus, the process works both in favor of both the buyer and the seller.
Simply put, a letter of credit is a letter written by the importer's bank to the exporter. It verifies that the payment will be guaranteed when the bank is presented with concrete documents (bills of lading and freight documents).
Most letters of credit are "irrevocable" once the importer has had them sent, which means it cannot be changed unless both the buyer and seller agree.
Click here to see a letter of credit flow diagram
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Evenly shared |
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