Currently, the most common methods of payment in international trade respectively the recognition rate and seller’s trust to the buyer are:
- Open Account Trade: Open account is a payment method in international trade where exporters first ship the goods to the importers and then they will be receiving the payment from the importers sometime after the shipment. Exporters will receive their payment in most cases 30 days after bill of lading date or 60 days after bill of lading date. This is the most risky payment type for the exporters because as soon as shipment completed exporters send all documents to the importers so that the control over the goods passes to the importers before payment initiated. Open account is the most frequently used payment method in international trade at the moment. 80% of all international business transactions are paid by open account terms.
- Documentary Collections: Also known as “Cash Against Documents”. Documentary collection is a good alternative to open account payment. Exporters ship the goods to the importers and then they collect the shipment documents and give them to their bank. Exporter bank sends the documents to the importers bank who gives the documents to the importers against payment or payment guarantee. Money will be send back to the exporter throughout the banks; from importer’s bank to exporter’s bank and finally from exporter’s bank to the exporter. If importers do not pay or accept to pay money for the documents banks will not be held liable under documentary collections which makes this payment method weak in terms of risk issues.
- Documentary Credits: Also known as “Letters of Credit”. Documentary credits are one step more secure payment methods than documentary collections as banks give the payment guarantee to the exporters. Documentary credits have two weaknesses. They are expensive and complicated. This payment option is suitable for medium to big amount transactions. Very limited professionals know the basics of letters of credit.
- Cash in Advance: Cash in advance is the opposite of open account. Exporters get their payments before they dispatch the goods to the importers. Cash in advance payment type is used in a very limited scale in international trade as it is not suitable for the importers who have the bargaining power in today’s global economy.