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Payments Terms in International Trade


To thrive as an exporter, securing payment for shipped goods is paramount. Various methods exist for receiving payments, each contingent on factors such as the exporter’s familiarity with the importer, the importer’s financial stability, and the level of payment security desired. The decision-making process encompasses considerations like the speed and cost of remittance, exchange restrictions in the importing country, and prevailing market competition.

Key Points:

  1. Payment Methods Overview:
    • Payment in Advance
    • Open Account
    • Documentary Bills
    • Documentary Credit under Letter of Credit
    • Shipment on Consignment Basis

1. Payment in Advance:

Payment in advance involves the exporter receiving a bank draft or advice before shipment. Although advantageous for the exporter, it’s less common due to reluctance from foreign buyers. Exceptions occur when demand is high, and goods are customized or rare. Large buying organizations may also pay in advance.

2. Open Account:

In an open account arrangement, the exporter sends documents directly to the importer, requesting payment. This method is simple but involves financial risk for the exporter. It is chosen when there’s a strong relationship, financial strength, no exchange restrictions, and permissive foreign exchange regulations.

3. Documentary Bills:

Documentary bills bridge the gap between the exporter’s need for payment before parting with goods and the importer’s reluctance to pay without assurance. The exporter submits documents, and payment occurs either on sight (D/P) or acceptance (D/A) basis, each with its risks.

4. Documentary Credit under Letter of Credit:

This method, involving a Letter of Credit (L/C), is the most popular. The importer’s bank guarantees payment to the exporter based on shipping document submission. Irrevocable and confirmed L/Cs offer the highest security for exporters, as payment is assured even if the importer’s bank delays remittance.

5. Shipment on Consignment Basis:

In this method, the exporter ships goods to an overseas consignee or agent while retaining ownership. Payment is made upon subsequent sale by the consignee. While providing an opportunity for buyers to examine goods, consignment carries risks such as uncertain payment dates, potential return of goods, and market-dependent pricing.


Choosing the right payment method in foreign trade is crucial for a successful export venture. Exporters must weigh the advantages and risks associated with each method based on the specific circumstances of their trade relationships and market conditions.

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