Payment Methods
Payment Methods
Payment methods in foreign trade are generally shaped according to the agreements made between importer and exporter companies. Different alternatives are preferred in payment methods depending on the level of trust between the companies and the number of business done together. However, each payment method also involves risks that the parties take at certain points. For this reason, both parties, regardless of whether they are exporters or importers, tend to prefer payment methods that prioritize their own interests.
So, what are the payment methods in foreign trade and what are the details of these payment methods?
Payment Methods in Export
Payment methods in exports are classified under several different headings. Generally, the responsibilities of the parties involved differ in each payment method. The responsibilities and risks imposed by different payment methods on importer or exporter companies also vary. Therefore, companies usually prefer self-insuring payment methods or goods transfers. Payment methods in exports are generally categorized as follows:
- Cash Payment / Cash Before Delivery
- Cash Against Goods
- Cash Against Documents
- Acceptance Credit
- Letter of Credit
The responsibilities imposed by each payment method on importer and exporter companies also vary. Thus, it’s crucial for companies to reach an agreement with the counterparty considering the payment methods, goods transfer, and the specifics of this transfer to protect their interests.
So, what are the details of payment methods in exports?
Prepayment / Advance Payment
In the advance payment method, the importer company must pay the exporter company for all the goods after the agreement is made, before the goods arrive. This payment method, where the entire payment is made directly before the shipment of the goods, is known as advance payment. In advance payment, all transport risks, such as accidents and loss of goods during transit, as well as delivery times of the goods, belong to the importer company. Since all risks in this payment method and goods transfer are on the importer company, it is not frequently preferred today.
Cash Against Goods
In the cash against goods payment method, the exporting company must first send the goods, and these goods must reach the hands of the importing company. After the exporting company delivers all of the goods to the transportation company, it also sends the documents representing the goods to the importing company, indicating that the goods have been delivered. Payment for the goods must be made after the goods reach the importing company. The importer company can pay the exporter company directly or through the bank as a payment method after the transport of the goods is completed. Unlike advance payment, in the cash against goods payment method, all risks, including the transfer of goods and payment, lie with the exporter company. Therefore, it’s not frequently preferred today.
Cash Against Documents
Payment made depending on the sales contract between the importer and the exporter company is called cash against documents. In cash against documents payment, the exporter company releases the shipping documents or the policy or bond representing the goods to the importer company after all the goods shipped by the importer have been received. Payment is made after all of the goods reach the exporter company. However, completing the payment solely through the bank entails paying the export price to the bank. After deducting the export fees, the remaining amount is directed to the bank account of the importing company, thus completing the payment.
Acceptance Credit
In acceptance credit payment methods, various commitments are made regarding the payments for the products sold by the exporting company. Payments are made within a specified term after the transfer of goods. In this payment method, payments are executed based on policies and agreements between importer and exporter companies. Generally, there are three different systems in acceptance credit payment methods:
Accepted Letter of Credit
In this payment method, the shipping documents included in the letters of credit prepared according to international rules and the policies prepared alongside these documents are used as a payment method. The documents accepted by the bank or a correspondent bank used by the importer company must then be released, and the document and policy fees must be paid on the specified dates.
- Acceptance Credit Against Documents:
This method is realized within the framework of shipping documents prepared by the bank and the policies accompanying these documents. All documents and policies prepared must first be accepted by the importing company. After the policy documents are delivered to the importer company, all goods received on the policy maturity date must be paid to the exporter company.
- Acceptance Credit Against Goods:
This method is used when the price of the goods sold by the importer company is not received. Through policy acceptance between the importer and the exporter company, payment is realized after the policy matures.
Cash Against Documents
Payment by Letter of Credit
Payment by letter of credit method is usually established at the request of the importing company. If payment is requested directly through the bank instead of using different payment methods, the letter of credit payment method is preferred. In this payment method, the letter of credit terms of the bank that carries out the transactions on behalf of the importing company or directly on behalf of the bank are valid.
Letter of credit conditions are generally presented as follows:
The importing company must agree to make payment to the exporting company or to the order of this company. However, various regulations also require importing companies to accept the policies issued by the exporter company and to agree to make payment on these policies.
The exporter must authorize an intermediary bank to accept all drafts drawn for the methods by which the exporter will pay the importer or for payments to be made on the drafts. At this point, documents are issued between the banks authorized separately by the importer and the exporter company.
Apart from the above items, the importer company may authorize another bank to perform the subsidiary transaction. In such cases, the agreements made between the two companies and the drawn policies are also evaluated and processed within this scope.
In general, the payment by letter of credit method involves the bank authorized by the importing company, per the importing company’s instructions, to fulfill the conditions requested by the company up to a certain amount or maturity. All documents regarding the transfer and delivery details of all goods to be exported by the exporter company are delivered to the importer company by the authorized bank. With these documents delivered or policies drawn, the importer company undertakes the payment to be made to the exporter company.
All agreements and letters of credit are prepared within the framework of the Uniform Customs and Practices for Documentary Credits brochure prepared by the International Chamber of Commerce. All agreements and drafts between importers and exporters must comply with the rules set out in this brochure. Although the basic rules are set, the total payment amount and policy maturity for the policies are directly related to the total amount and nature of the products sold.