Methods of International Payment - Payment in Advance, Letter of Credit, Clean Payment, Bill of Exchange
- Payment in advance:
- Payment is sent by the buyer before goods are sent
- Most secure for exporter (less risk)
- Highest risk for importer (least secure)
- Letter of credit:
- Bank-to-bank commitment. The buyer’s bank guarantees payment for goods once bank receives certain documents agreeing to buyer’s terms of purchase.
- More secure for exporter, reduces risk as bank takes on payment risk
- High risk for importer, less secure if terms of documents are not met
- Clean payment:
- Payment is sent to, but not received by exporters before goods are transported.
- Offers relatively cheap and uncomplicated method of payment. All shipping handled between trading partners. The role of bank is limited to clearing amounts as required. Includes advanced payment and open account (goods are sent to buyer with request for payment at later date).
- Bill of exchange:
- Written order from the seller requesting the importer pay a certain amount at a specified time
- Exporters send documents from bank to buyer’s bank after goods have been sent. Exporter can specify goods are to be released to the buyer only after payment is received.
- Less secure for exporter, but risk is reduced as they can communicate directly between their bank and buyer’s bank.
- More secure for importer, responsibility to pay is after goods have been sent.
Extract from Business Studies Stage 6 Syllabus. © 2010 Board of Studies NSW.