Payment methods in international trade

Payment methods in international trade

In international commercial transactions, the amount in which the seller transfers ownership of the goods to the buyer in return is paid in various ways. Payment methods have evolved throughout history to minimize the risk of non-payment. In this article, various payment methods in international trade are examined and the status of each in terms of risk for the buyer and seller is stated. Each of these methods has disadvantages that are generally referred to as disadvantages.

Until the end of the eighteenth century, trade had a fixed and rudimentary method. The buyer or his representative personally approached the seller and, paying the price of the goods in cash, picked up the goods and carried them with him. In this way, neither party was exposed to breach of contract and breach of contract by the other party, and there was no risk of payment. The industrial revolution of Europe and the United States also created a revolution in international trade which, due to the necessity of the intervention of individuals and institutions in the transportation of goods on the one hand and the payment of goods on the other hand, made the application of basic methods impractical.
After that, it was tried to meet the needs of the people of the countries through goods and services superior to other countries. But when this movement began, many problems were faced by traders and merchants. These problems disrupted the process of international trade. Therefore, based on the knowledge of merchants from each other, different methods were considered to solve it. The most important problems, namely how to receive real goods and pay for them, led to the creation of methods for financial payment of funds from the purchase of commercial goods.

Types of payment methods

Payment methods in international transactions vary depending on various factors. The parties choose one of the types of payment methods in their transaction, taking into account the level of trust they have in each other and also considering the economic and political situation.
– Cash or advance payment
– Payment on an open or promissory account
– Payment on you
– Payment by letter of credit (L / C)
– Cash or advance payment: In this case, the buyer of the goods, the entire amount with the order of the goods to the seller. The seller then sends the goods to him, in which case the major risk falls on the buyer in favor of the seller. (Which is one of its major disadvantages) If the seller does not send the goods or his goods do not have the desired features and specifications at the time of the transaction, many problems are created and the buyer loses, but this method of payment takes time. It may be appropriate to: First, the buyer has full confidence in the seller. Second, the regulations of the buyer country should allow full advance payment, and second, the buyer and seller should ensure that the government does not impose restrictions on the export and import of goods and services. (Rezaei and Mohtaram, 2012, p. 20)
– Payment on an open account: This method, in terms of risk and trust, is exactly the opposite of the prepayment method. Here, the seller, based on the agreement he has made with the buyer, sends the goods and loses his ownership by sending the goods and shipping documents and gives them to the buyer. The buyer will pay according to the terms of the contract based on the agreement. In this case, the seller has full confidence in the buyer and the government does not impose restrictions on the export and import of goods. (Rezaei and Mohtaram, 2012, p. 19). However, the risk of this payment method is borne by the seller who to reduce the risk can send the goods in several stages and after receiving the amount of goods shipped to send the rest of the goods .
Payment based on receipt (collection – documents): To further ensure the transaction (compared to the two methods mentioned) and the accuracy of the goods sent, the parties can do their transactions through you. For this purpose, the seller sends the goods and sends the shipping documents directly to the buyer and issues a bond with the buyer (receipt or simple). However, in order to be more confident, the seller of the goods tries to send the goods through Barwat. (Zamani Farahani, 2006, p. 49)
Payment based on your documents: In this case, the seller sends the documents through a bank, ie he asks his broker bank to send the documents with you to the broker bank in the buyer’s country, which after receiving those documents by the bank based Your type (visual – long-term) provides the buyer with documents. In this case, the buyer’s broker bank will deliver the documents to the buyer in exchange for a visit when he receives the money from him, and in return for the term, he will take the endorsement and acceptance of the buyer and deliver the documents to him. The receipt will take your amount and deliver it to the seller’s broker bank. Therefore, four parties are involved in your documents: seller, broker bank, seller broker bank and buyer. Of course, these banks are not responsible for the contents of the documents, etc., and only reduce the seller’s risk in receiving the goods. In some countries, the broker bank puts its name on you next to the buyer’s name, which indicates a payment guarantee for you at maturity and increases the issuer guarantee. (Rezaei and Mohtaram, 2012, pp. 34 and 35)
Payment by Letter of Credit (L / C): Letter of credit is a contract by which the importer of goods instructs the issuing bank to pay the goods to the issuer. The issuing bank pays the goods to the issuer as soon as the required documents are submitted directly or through another bank (introduced) located in the exporting country.

Advantages of this method for the buyer: – Ability to check whether the exporter has complied with the terms of the transaction or not – Loading of goods is done within a specified and short period of time – Goods are produced and sold with international standards and procedures and reasonable prices – Receive a loan and credit from the bank to pay the credit immediately to the seller – through the bank is guided and receives professional advice.

The advantages of this method for the seller: – If he meets the conditions stated in the L / C, there is no risk of not receiving the money – Payment is made in a bank in his own country 3- Ability to receive the goods after loading Receives professional advice through the bank. Of course, this method has disadvantages, such as: time-consuming steps of credit opening and its cost