Introduction and background

The role of payment in international trade is complicated by many factors. International trade, particularly sales of goods transactions, often involve long periods of transit, multiple buyers and sellers who are unfamiliar to each other, different currencies and different laws. For these reasons the method of payment chosen by the parties will be crucial to the contract of sale. As many sellers will require payment to procure the goods from suppliers and arrange for transport of the goods, the buyer’s creditworthiness will be necessary to ensure the seller is paid for his goods and services. This chapter will examine some of the most common methods of payment in international transactions, each having inherent risks as well as benefits to the parties. In particular, we will be examining payment by open account, bills of exchange, documentary collections, letters of credit, factoring and forfaiting.

Open account

Open account as a means of payment in international trade is usually seen where the buyer and seller have done business in the past and may continue to do so on a frequent basis. This particular method of payment carries with it a very high risk to the exporter as he will usually ship the goods in advance of payment. The buyer will usually pay the seller within thirty days of receiving the goods. Open accounts benefit the importer enormously as he is able to obtain the goods without restricting his cash flow. It is recommended that the exporter only use this method of payment when he is certain of the creditworthiness of the buyer. It does offer some benefit to the exporter as he will be able to increase his ability to stay competitive in the market. The exporter can protect himself from non-payment by the buyer if he takes out export credit insurance.