Payment in International Trade
Two broad methods of financing international transactions are direct payment between seller and buyer; or finance through banks. Practically, payment is effected by the following methods:
Cash in Advance: buyer transfers funds to the seller’s account in advance pursuant to the sale contract.
Open Account: arrangement for the buyer to advance funds to an ‘open account’ of the seller on a fixed date or upon the occurrence of a specified event, such as delivery of the goods.
Bills of Exchange: negotiable instrument representing an order to the bank in writing to pay a certain sum of money to the bearer (or specified person) on demand, or at a fixed or determinable future time.
Documentary Bill: seller (drawer) draws a bill of exchange on the buyer (drawee) and attaches it to the bill of lading. The idea is to secure acceptance of the bill of exchange by the buyer; and the buyer is bound to return the bill of lading if he does not honour the bill of exchange.
Documentary Credits: the bank, on behalf of buyer, issues a letter of credit undertaking to pay the price of the sale contract on condition that the seller complies with credit terms. Upon presentation of necessary commercial documents verifying shipment of goods, the bank collects payment for goods on behalf of the seller. In the collection process, the buyer pays for goods in exchange for title documents. Under this method the bank guarantees the buyer’s title to the goods and guarantees payment to the seller.
Read more about this topic: International Commercial Law
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