Types of Payments in Foreign Trade

Payment of goods supplied in the local trade is a rather simple matter. It is made either in advance or within a sensibly short period after delivery. If a buyer fails to pay, there comes legal action¹ after which payment can be enforced.

The matter is different in foreign trade because a great deal of time is spent on correspondence, despatch and delivery. It is here that banks play a fundamental part. Their services have to be paid for, but are not expensive and always necessary - the bank comes into each transaction at this or that stage.

Payments in foreign trade are usually made by:

• 1. banker’s transfer;
• 2. bill of exchange;
• 3. letter of credit.

As well as in the local trade, payment may be made a) in advance; b) on open account.

Payments in advance are used 1) when a buyer is in urgent need; 2) when a buyer is unknown to a seller; 3) in the case of a single isolated transaction. The method of payment in these cases will probably be by banker’s draft or banker’s transfer.

Open account terms are granted by a seller to a buyer of unquestionable reputation² in whom he has complete confidence, e.g. regular customers, agents or distributors. In these cases payment is made quarterly by bill of exchange or banker’s transfer.

The banker’s transfer is a mere transference of money from the bank account of a buyer in his own country to the bank account of the seller in the seller’s country. It is only necessary for the customer to send a letter of instruction to his bank - or use a special form. The transfer is executed at current rates of exchange³ and subject to any exchange control regulations of the countries concerned.

The bill of exchange (B/E) is a written order from a creditor to a debtor to pay on demand or at a specified date a stated sum of money to a person named on the bill, or to his order. The bill is drawn by the creditor on the debtor, and is sent to the debtor or his agent to pay or accept⁴ (to acknowledge the debt). The debtor accepts it through signing his name on the front of the bill, together with the date. The bill becomes now legally binding⁵, and the acceptor must meet it at or before the due date. Failure to meet the bill on the due date will result in total discredit for the creditor, and legal action can follow. Ал unpaid bill is called " dishonoured" ⁶, and the creditor can protest⁷ it, which gives him the right to prosecute⁸ the debtor.

The letter of credit (L/C) is the most generally used method of payment in the export trade. It starts with the buyer who instructs his bank to issue the L/C for the amount of the purchase and in favour of the seller. The buyer’s bank sends this instruction, a special printed form containing full details of the transaction, to its agent (a bank cooperating with it) in the seller’s country. On receiving the instruction, the agent bank informs the seller about the credit. The seller can now carry out the buyer’s order, knowing that when he has done so, the money will be paid at once by the agent bank. The buyer is equally secure, because the agent bank will pay on his behalf only if the conditions of the transaction are completely executed by the seller.

A L/C may be paid to the seller not immediately upon execution of the order. If there is an agreement between the seller and the buyer the agent bank can accept a bill of exchange drawn by the seller on the agent bank. The buyer gets credit and the action is absolutely safe for the seller, who can discount the bill for ready cash if he needs it.