Page 38 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

Unit 2: Methods of Payment and Incoterms

from exporter remitting bank, informs the importer, who is supposed to make payment Notes
in exchange for trade documents. The collecting bank remits the payment to the remitting
bank, which in turn transfers the funds to the exporter’s account. However, this payment
option can be used effectively only when an original, clean bill of lading is used, because
the bill of lading carries the title of goods and importer must endorse the bill of lading and
surrender it to the shipping company for receiving the goods. This payment option can be
risky for the exporter when the airway bills are presented for receiving payments, as the
airways bill does not carries the tile of goods.
Some degree of risks remain even in documents against payments as the importer may
change his mind or become insolvent or may be unable and unwilling to make the payment
as his creditworthiness has suffered from the time when the cargo was shipped, and trade
documents along with drafts are presented for payment by the exporter bank. The trade
policies of the importer country may also change resulting in a ban or restriction on
export and import of that item or on outflow of foreign exchange from the country. The
exporter shall consult his international banker before entering into such payment option
for an international trade transaction.
Table 2.5: Key Features of Documents against Payments and
Documents against acceptance

Assessment Factor Documents Against Documents Against
Payments Acceptance
Time of Payment After shipment, but before On maturity of draft at a
documents are released specified future date
Transfer of Goods After payment is made on Before payment, but upon
sight acceptance of draft
Exporter Risk If draft is unpaid, goods may Has no control of goods and
need to be disposed may not get paid at due date
Source: International Trade Operations by Dr. Ram Singh

Task You are required to write a letter to your Banker for opening letter of credit for
importing capital goods worth $90,000 from XYZ Ltd.

2.1.3 Open Account

The most risky mode of payment for any exporter as an open account trade transaction means
that the goods or services are shipped or transported and delivered to the importer on credit
basis and payment will come after the due date, usually 30 to 90 days. Under this mode of
payment, the exporter simply bills the importer and the latter is expected to make payment
under agreed terms and conditions at a future date. Hence, this is the most advantageous
preposition to any importer as he can sell the goods in local market during the credit period and
then make payment to the exporter. The importer has both cash flow as well as cost-advantage
under this mode of payment.
Competition is acute in export markets in today’s business environment and many suppliers are
chasing the same markets and same buyers, making it a buyers’ markets in many areas of
international trade activity. Importers can exploit such a situation for their benefit by dictating
payment terms for supply of goods or services to exporters. This method of payment can be
smartly used if the exporter covers his risk through credit risks schemes of ECGC or factoring
services. Trade enthusiastic nations today are motivating their exporters for such risks as they
want to win new unexplored markets by giving them insurance cover for payments, as this

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