Terms of Payment in International Trade

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Russian: Условия платежа в международной торговле

“Ultimately, any sale is a gift until payment is received. Understanding how to get paid for export transactions is especially crucial, since your buyer could be 10,000 miles away”[1].

Payment is an inherent part of the process of international trade or other transactions or operations. The means of payment is crucial in an international sale due to the risk of delayed or deferred payment as well as partial payment and non-payment. An additional contribution in the importance of the terms of payment makes a floating of currency rates. Therefore, "Terms of Payment" is one of the crucial mandatory or essential contract clauses

Summary on Terms of Payment in International Trade[2] [3] [4] [5]

Terms of Payment Defined
Usual Time of Payment Goods Available To Buyer Risk to Seller Risk to Buyer Comments Explications
Cash in Advance (CIA) is such terms of payment when an importer must pay the exporter in cash before a shipment is made. The logic behind the structure of such a transaction is that if an exporter ships a product to an importer and the importer does not pay for the item, the exporter has very little recourse. This term can be used in a variety of businesses, but it is most common in the import/export business.
Before shipment After payment None Complete.

Relies on seller to ship exactly the goods expected, as quoted and ordered

Seller's goods must be special in one way or another, or special circumstances prevail over normal trade practices (e.g., goods manufactured to buyer-only specification). Prior to receiving a shipment of a product from an overseas vendor, many importers are required to send cash in advance. By structuring the transaction in this manner, the exporter (or maker of the product) is protected against the possibility of non-payment by the importer.

General Data (See details in the next two items.)

Letter of Credit (L/C)is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase

Commerical Invoice must match the L/C exactly.

Dates must be carefully headed.

"Stale" documents are unacceptable for collection.

Letters of Credit require total accuracy in conforming to terms, conditions, and documentation.

Consult your shipping adviser for determining feasibility of terms and conditions.

Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.
A second guarantee, in addition to a letter of credit, that commits to payment of the letter of credit. A confirmed letter of credit is typically used when the issuing bank of the letter of credit may have questionable creditworthiness and the seller seeks to get a second guarantee to assure payment.
After shipment is made, documents presented to the bank After payment Gives the seller a double assurance of payments.

Depends on the terms of the letter of credit.

Assures shipment is made but relies on exporter to ship goods as described in documents.

Terms may be negotiated prior to L/C agreement, alleviating buyer's degree of risk.

The inclusion of a second assurance of payment (usually a high-ranked domestic or Prime World Bank) prevents surprises, and adds assurance that issuing bank has been deemed acceptable by confirming bank.

Adds cost and an additional requirement to seller.

A letter of credit is a document issued by a bank that allows the holder of the letter to draw the funds as stated on the letter from the issuing bank. In contrast to a confirmed letter of credit, if the seller does not seek the second guarantee, the document would be called a unconfirmed letter of credit.
A letter of credit where only the bank issuing it has agreed to guarantee payment. This differs from a confirmed letter of credit, where at least two banks guarantee payment. This increases the risk for the bank that honors the letter of credit, as it only has one, rather than two, ways to seek recourse.
Same as above Same as above Seller has single bank assurance of payment and seller remains dependent on foreign bank.

Seller should contact his banker to determine whether the issuing bank has sufficient assets to cover the amount.

Same as above Credit can be changed only by mutual agreement, as stipulated in a sales agreement.

Becomes open account with buyer's bank as collection agent. Foreign bank may have problems making payment in sum or timeliness.

An unconfirmed irrevocable letter of credit provides a commitment by the issuing bank to pay, accept, or negotiate a letter of credit. An advising bank forwards the letter of credit to the beneficiary without responsibility or undertaking on its part but confirming its authenticity. It does not provide a commitment from the advising bank to pay, so the beneficiary is reliant upon the undertaking of the overseas bank..

(See next two items.)

Documentary collection is a trade transaction in which the exporter hands over the task of collecting payment for goods supplied to his or her bank, which sends the shipping documents to the importer’s bank together with payment instructions.
Remittance time from buyer's bank to seller's bank may still take one week to one month Drafts, by design, should contain terms and conditions mutually agreed upon. A draft may be written with virtually any term or condition agreeable to both parties. When determining draft tenor (terms and conditions), consult with your banker and freight forwarder to determine the most desirable means of doing business in a given country A key document in documentary collections is the bill of exchange or draft, which is a formal demand for payment from the exporter to importer. D/Cs can be classified into two types, depending on when payment is sought by the exporter: 1) documents against payment (D/P), which requires the importer to pay the face amount of the draft at sight, or 2) documents against acceptance (D/A), which requires the importer to pay on a specified future date.

(with documents against payment) D/P

A documents against payment (D/P) arrangement requires the importer to pay the face amount of the draft at sight.
On presentation of draft to buyer. After payment to buyer's bank. If draft not honored, goods must be returned or resold.

Storage, handling, and return freight expenses may be incurred.

Assures shipment but not content, unless inspection or check-in is allowed before payment. A draft can be a collection instrument used to exchange possession and title to goods for payment.

Seller is essentially drawing a check against the bank account of the buyer.

Buyer's bank must have pre-approval, or seek approval of the buyer prior to honoring the check.

Payble upon presentation of documents.

In a D/P collection, the exporter ships the goods and then gives the shipping documents to his or her bank (which is also known as the remitting bank). The bank forwards these documents to the importer’s bank (known as the collecting bank), which will only release the documents to the importer on receipt of payment for the goods. The collecting bank then remits the funds to the exporter’s bank for payment to the exporter.

The exporter’s risk is obviously higher in the D/A collection process, since the exporter has no control over the goods after the importer’s acceptance and may not get paid for them.

TIME DRAFTS (with documents against acceptance)- D/A
A documents against acceptance (D/A) arrangement requires the importer to pay on a specified future date..
On maturity of the draft Before payment, after acceptanc Relies on buyer to honor draft upon presentation Assures shipment but not content. Time of maturity allows for adjustments, if agreed to by seller. Payable based upon the acceptance of an obligation to pay the seller at a specified time. Although a time draft has more collection leverage than an invoice, it remains only a promissory note, with conditions. A D/A collection differs from a D/P collection because the exporter extends credit to the importer through a time draft in the latter case. Once the importer signs the time draft – which becomes a binding obligation to pay by the due date shown on the draft because of the signed acceptance – the documents are released to the importer. The collecting bank contacts the importer on the due date for payment, which upon receipt is remitted to the exporter’s bank for payment to the exporter

The exporter’s risk is obviously higher in the D/A collection process, since the exporter has no control over the goods after the importer’s acceptance and may not get paid for them.

Open Account is a credit relationship in which the buyer pays upon the receipt of goods, or on deferred payment basis.
As agreed, usually by invoice Before payment Relies completely on buyer to pay account as agreed None All terms of payment, including extra charges and terms should be mutually understood and agreed upon prior to open account initiation.

Companies conducting ongoing business are candidates for open account terms of payment. Seller must measure not only buyer's credit reliability but the country's as well.

An exporter ships the goods before the payment is made and doesn't have any control over the goods or over the payment. The seller (exporter) totally relies on the buyer and if the payment has been refused, legal action is the most likely scenario. This usually involves not only significant legal fees but also seller’s time and energy and there is no guarantee that the will recover his or her money.


  1. Chrisbaum, D. R. Show Me The Money, “Export America,” July 18, 2003, Volume 2,No. 7, a publication of the U.S. Department of Commerce.
  2. http://www.foreign-trade.com/reference/payment.cfm
  3. http://www.investopedia.com
  4. http://www.export61.com.au/international-payments
  5. http://www.gov.mu/portal/sites/smeportal/existing/intpayment.htm
  6. Factually, draft, or bill of exchange, is the most important document in documentary collections. However, "documentary collection" and "draft" are very often used as synonyms. This is a reason, why there is "draft" in brackets.
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