International Trade Techniques: Are You Familiar with These Payment Methods?

tendata blogTrade Trends News

ten data blog10-11-2023

In international trade settlements, there exists a variety of payment methods, often necessitating specifics based on the circumstances. Different types of traded goods, diverse trading partners, and varying trading practices might call for the combination of two or more payment methods. This fusion could facilitate transactions, ensure timely and secure receipt of payments, or handle payments prudently.

Common combinations of different payment methods include:

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1. Combining Letter of Credit (L/C) and Collection

This involves splitting the payment for a transaction: part of the payment is made via a letter of credit, while the remaining balance is settled through collections. Typically, this combination involves the exporter creating two drafts under the letter of credit. A portion of the payment, as per the letter of credit terms, is settled through sight drafts, while the remaining amount is attached to shipping documents under the collection and paid through sight or deferred payment against documents. This method ensures a secure receipt for the exporter and reduces the need for advance funding by the importer, making it mutually acceptable. However, the letter of credit must specify the type and amount of the credit and the type of collection, along with the clause "presentation of documents only upon full payment of the invoice amount."

For instance, a contract could outline: "The buyer shall open and deliver to the seller an irrevocable sight letter of credit through the seller's acceptable bank x days before the month of shipment. xx% of the invoice amount to be paid by sight draft and the remaining xx% to be paid immediately by document against payment through collection. The full set of shipping documents, covering 100% of the invoice amount, to be released after the buyer settles the entire invoice. In case of non-payment, the shipping documents will be handled as per the seller's instructions by the issuing bank."

2. Combining Letter of Credit and Telegraphic Transfer (T/T)

This method involves a partial payment through a letter of credit and the rest through telegraphic transfer. It's commonly used in trades involving primary products with a flexible delivery quantity. The letter of credit specifies an initial payment against the invoice or a pre-payment before the shipment of goods, while the remaining balance is settled via telegraphic transfer after the goods arrive at the destination or upon reevaluation of the actual quantity. This combination requires explicit terms regarding the type of letter of credit, the T/T method, and the proportion of payment against the letter of credit.

3. Combining Telegraphic Transfer with Bank Guarantee or Letter of Credit

This method is often used for settlement of payments involving complete sets of equipment, large machinery, and major transportation vehicles (such as aircraft, ships, etc.). It typically involves the buyer making a partial payment or a deposit through telegraphic transfer, with the remaining payment specified in the letter of credit or covered by a guarantee issued by a bank.

· Payment by Instalments involves staged payments before or upon delivery, often with the buyer establishing an irrevocable letter of credit.

· Deferred Payment entails an initial payment by T/T, with the remaining balance paid over a period of years after delivery.

These methods might seem similar, but they differ significantly in terms of when the payment is completed and the associated risks and interest obligations. In international trade, the choice of a particular combination often depends on the specific trade circumstances.

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