Question

Explain the different methods by which an importer can make a payment to an exporter. List them in increasing order of risk to the importer and to the exporter.

Answer 1

Different ways in payment can be made to the exporter are:

• Cash in Advance: The payment is received before the ownership is transferred to the importer.
• Letters of Credit: A letter of Credit is a guarantee made by the importer's bank to the exporter that the payment will be made.
• Documentary Collections: The collection is entrusted to be made by the exporter's bank. The exporter's bank sends the documents to the importer's bank which in turn collects the payment from the importer.
• Open Account: The goods are shipped and delivered to the importer before the payment due date.
• Consignment: The payment is made to the exporter after the goods are sold to the end customer by the importer.