Page 31 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

International Trade Procedures and Documentation

Notes 4. Documents against Acceptance

5. Open Account
6. Other Payment Methods used in the LPG&M era
In a changing scenario in today’s era, while choosing any mode of payment, the exporter has to
assess not only the risks, but also the degree of risk and where this risk essentially lies. If he is
successful in assessing and appraising the quantum and location of risk he can essentially reduce
his risk by using alternate modes of payment. For example, if the exporter feels that the importer
does not have good creditworthiness he can choose L/C as mode of payment whereby the onus
of payment will be on L/C issuing bank rather than on importer, as getting paid in full and on
time is of utmost concern for any exporter. The exporter can take the help of international
bankers, Export Credit Guarantee Corporation and other credit ranking agencies such as D&B
for appraising, assessing and analysing the degree and location of risks involved in a specific
trade transaction. The Figure as given below can be of some help for a first time exporter in
assessing risk and choosing the method of payment for the trade deal.

Figure 2.1: Mode of Payment A Risk Appraisal

EXPORTER RISKS IMPORTER RISKS
HIGH LOW

1. Open Accounts
2. Documentary Collections
a. Time Drafts (D/A)
b. Sight Drafts (D/P
3. Letter Of Credit
4. Payments In Advance

LOW HIGH
Source: Trade Finance Guide, US Department of Commerce

2.1 Methods and Instruments of Payment in International Trade

The following is a detailed elaboration of basic and other methods of payments, which has
evolved in today’s liberalised era in international trade for realisation of export proceeds from
the importer.

2.1.1 Cash-in-Advance

Cash-in-advance is the most safe and secure mode of realization of export proceeds for an
exporter as he receives payments for trade deals before the shipment of goods from his
country. Using this method of payment, exporter not can only avoid the credit risk involved
in the trade deal but actually would have received payments well in advance before the actual
transfer to title of ownership of goods in favour of the importer. Payment in advance can be
availed of by several ways and; in the modern era, wire transfers and credit cards are the most
commonly used cash-in-advance method of payment to exporters. Some major reasons for
using wire transfers and credit cards are that the exporter is relieved from all problems that
may occur during the process of collection and can immediately use the funds for his business
purposes, which is not possible in other modes of advance payment such as, payment by

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