Payment in advance

There are 4 basic terms of payment in foreign trade.

1) payment in advance (down payment)

2) payment by means of L/C

3) payment against documents D/P

4) payment after delivery (cash against documents)

is usually effected by a mail or telegraphic transfer from the buyer’s account to the seller’s banking account.

a) In the export trade payment in advance is the most favourable for the seller because the risk of non-payment for the goods is totally excluded. But payment in advance is not too frequent in foreign trade because the buyers are generally unwilling to pay for the goods before they can lay hands on them. If they agree to it they insist on a special discount on the price.

b) In the import trade on the other hand payment in advance is the least advantageous of all terms of payment because it is a credit transaction with all its risks.

A letter of credit – L/C

Is the most current and one of the best means of payment. The buyer instructs his bank to open an account with a bank in the seller’s favour. The seller may draw it against presentation of certain documents stated in the L/C – called shipping documents. The L/C is opened for a fixed sum and its validity may be extended. Irrevocable L/C means that it cannot be recalled before the date of expiry...

In foreign trade payments are usually made by irrevocable L/C against shipping documents. There are 2 kinds of L/C:

a) personal L/C is available against the signature of the owner and against presentation of his passport or identity card. It is used mostly by travellers.

b) documentary L/C is called so because it is available against presentation of shipping documents.

D/A – Documents against Acceptance, the buyer receives the documents after his accepting a Bill of exchange drawn on him for the price, at a given period may be 30, 60, or even 90 days.

D/P – documents against payment means cash against documents. The specified documents with a copy of the invoice are handed over to the buyer on payment of the full price in cash.

Topic 4: Export documents

Some of the most essential transport documents are Bill of Lading, Commercial Invoice, Customs Invoice, Certificate of Origin.

A Bill of Lading serves a number of purposes:

- it is an evidence that the shipping line has received the goods;

- it is an evidence of the contract between the Shipper and the Shipping Line;

- it is a shipping line’s promise to hand over the goods to the Holder of the B/L;

- it is a document of title.

A bill of lading can be negotiable which means it can be transferred to a third party provided it is endorsed.

The Commercial Invoice is the Seller’s formal request for payment. It serves the following purposes:

- it is a record of the transaction between the Seller and the Buyer;

- it is the basis on which the customs authorities assess how much duty is to be paid;

- it is used to confirm the value of the goods for insurance purposes.

Some countries may require the exporter to provide a customs invoice. It requires additional information such as the domestic value and export price of the goods.

The Certificate of Origin is issued by the Chamber of Commerce as a proof of where the goods were produced.

There are two reasons why a certificate of origin is necessary:

- if there is a trade agreement between the exporting and importing countries;

- for political reasons, to prove that the importers aren’t importing goods from the countries with which trading relations are not desired.

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