International Trade Payment Methods

Posted on May 5, 2024 in Law & Jurisprudence

Balance of Payments

Current Account

The current account includes the trade balance (goods and services), income balance, and current transfers.

Capital Account

The capital account encompasses capital transfers and acquisitions/disposals of non-produced, non-financial assets.

Financial Account

The financial account covers direct investments, portfolio investments, other investments, and reserve assets.

Incoterms

  • EXW (Ex Works): Seller makes goods available at their premises; buyer assumes all transportation and associated costs.
  • FAS (Free Alongside Ship): Seller delivers goods alongside the ship at the named port of shipment; buyer assumes responsibility from that point.
  • FCA (Free Carrier): Seller delivers goods to the carrier or another party specified by the buyer; risk transfers to the buyer upon delivery.
  • FOB (Free on Board): Seller delivers goods on board the ship at the named port of shipment; buyer assumes responsibility from that point.
  • CFR (Cost and Freight): Seller arranges and pays for carriage to the named port of destination; risk transfers to the buyer upon loading.
  • CPT (Carriage Paid To): Seller pays for carriage to the named destination; risk transfers to the buyer upon handing goods over to the carrier.
  • CIF (Cost, Insurance, and Freight): Seller arranges and pays for carriage and insurance to the named port of destination; risk transfers upon loading.
  • CIP (Carriage and Insurance Paid To): Seller pays for carriage and insurance to the named destination; risk transfers upon handing goods over to the carrier.
  • DAF (Delivered at Frontier): Seller delivers goods to the named border point; buyer assumes responsibility from that point.
  • DEQ (Delivered Ex Quay): Seller delivers goods on the quay at the named port of destination; buyer assumes responsibility from that point.
  • DDU (Delivered Duty Unpaid): Seller delivers goods to the named destination but does not pay import duties; buyer assumes responsibility for import clearance and duties.
  • DDP (Delivered Duty Paid): Seller delivers goods to the named destination and pays all import duties; buyer assumes minimal responsibility.
  • DES (Delivered Ex Ship): Seller delivers goods on board the ship at the named port of destination; buyer assumes responsibility from that point.

Payment Methods

Personal Check

  • Used for importing goods and services.
  • Parties involved: Drawer (issuer), drawee (paying bank), payee (beneficiary).
  • Advantages for importer: Saves bank charges, faster issuance.
  • Disadvantages for importer: Lack of security, risk of loss, high costs for exporter.

Cashier’s Check

  • Issued by a financial institution, guaranteeing payment to the beneficiary.
  • Parties involved: Customer, issuing bank, paying bank, beneficiary.
  • Disadvantages for importer: Issuing commission, advance of funds required.
  • Advantages for importer: High security.
  • Advantages for exporter: Easier negotiation, lower risk of default.
  • Disadvantages for exporter: Collection can be burdensome and expensive.

Simple Payment Order

  • Bank transfer or direct payment from importer’s bank to exporter’s bank.
  • No documentary support or guarantee for the seller.
  • Parties involved: Originator (importer), issuing bank, paying bank, beneficiary (exporter), reimbursing bank.
  • Advantages for exporter: Lower cost, no risk of loss, efficient collection.
  • Types: Direct, indirect, payment order, collection order.

Documentary Payment Order

  • Importer instructs their bank to pay the beneficiary upon presentation of specified documents.
  • Parties involved: Originator (importer), issuing bank, paying bank, beneficiary (exporter).

Simple Remittance

  • Financial documents sent by importer to exporter, not accompanied by commercial documents.
  • Variants: Based on trust and relationship between parties.
  • Classes: Sight (immediate payment), term (future payment with or without acceptance).

Documentary Remittance

  • Payment instrument where exporter instructs their bank to release commercial documents to the importer against payment or acceptance.
  • Advantage for exporter: Ownership not transferred until payment or acceptance.
  • Advantage for importer: Can verify goods before payment.
  • Classes: Documents against payment, documents against acceptance, documents against trust receipt.

Letter of Credit

  • Buyer’s bank guarantees payment to the seller upon presentation of specified documents.
  • Disadvantage: Complex, slow, and costly.
  • Parties involved: Payer (importer), issuing bank, advising bank, beneficiary (exporter).