Popular Payment Methods

There are many ways in which an importer can pay to the exporter. But the four basic mode of payments, which takes various shapes of payments, are Payment in Advance, Open Account Payment, Documentary Collections and Documentary Credits / Letter of Credit. Each method is explained below:

Payment in Advance
In 'payment in advance' method, the entire risk is put on the importer. Under this term of purchase, the importer makes full payment to the supplier before the shipment of goods are done. The importer trusts the supplier that the shipment of the product will be on time and the goods will be as advertised. This method of payment generally takes place under the following circimstances:

• If the importer has not been long established.
• If the credit status of the importer is doubtful, unsatisfactory and/or the political and economic risks of the country are very high.
• If the product is in high demand and the seller does not have to accommodate the importer's financing request in order to sell the product.

Documentary Collections
This term of payment offers an important bank payment mechanism. It serves the need of both, the exporter as well as the importer. In this mode of payment, the sale transaction is settled by the bank through an exchange of documents. Hence, it enables the payment and transfer of title simultaneously.

Summarisation of Payment Methods

	Payment in Advance	Documentary Credit	Documentary Collection	Open Account
Bank Charges	Lowest	Highest	Medium	Lowest
Payment Risk	Exporter has concerns over the ability and willingness of importer to pay.	Payment is guaranteed by issuing bank if terms of credit are met.	Payment risk unchanged but mitigated by control over the goods.	Exporter is comfortable with the reliability of the importer to pay.
Country Risk	High Exporter requires payment before shipment.	High Exporter requires assurance of a confirmation from a bank in a low risk country.	Medium Exporter mitigates risk by using the banking system to retain control over the goods by holding on to title documents.	Low Open account does not mitigate country risk in any way.
Credit Facilities	Not required	Required	Not required	Not required
Cash Flow	Importer has a good cash position. Exporter needs cash as early as possible.	Importer wants to delay cash outflow. Exporter's cash flow must be able to support the delay.	Importer wants to delay cash outflow. Exporter's cash flow must be able to support the delay.	Importer wants to delay cash outflow. Exporter's cash flow must be able to support the delay.
Price	Importer may be able to negotiate a discount.	Price may be lower in exchange for added security of bank guarantee.	Effect on price depends on terms of collection.	Importer may pay a premium for supplier credit.