Modes Of Payments In International Trade

International trade differs from domestic trade with respect to methods and documents used.  In a domestic transaction the buyer and the seller are closer to each other, than in case of foreign trade.  In international trade it is usually difficult for the seller to obtain correct information about the credit worthiness of the buyer abroad. There are also the problems of communication.  Moreover the means of transportation are less certain.  This increases the problems of collection, since any legal recovery process will be costly and time consuming.  In any case whether the sale is for cash or credit, payment has to be made.  Following are the some of the basic modes of payment in international trade.

Open Account:

The seller debits the account of the importer whenever he exports goods.  The account is settled periodically in accordance with the terms of credit and rate of interest agreed upon in advance.  The exporter sends the documents of title directly to the importer.  This method saves the exporter from the trouble of drawing and discounting bills of exchange.  But a great degree of risk in payments is involved. 

Consignment Sale:

The exporter has selling agents abroad.  The consignment is dispatched to the agent, who receives the goods without making any payment for them.  The little of the goods remains with the exporter.  Sale is made by the agent for and on behalf of the exporter.

Deferred Payments:

This mode of payment is adopted in case of expensive capital equipment or machinery.  The importer pays a part of the price in advance and another part on receiving the shipping documents.  The balance is payable in periodical installments spread over a period of two to seven years.  The unpaid balance is generally guaranteed by the importer's bank.

Bank Transfers:

The importer makes payment to a local bank in home currency which arranges for payment to the payee abroad in the currency of his country either through the branch of the local bank or a foreign bank with which the local bank has arrangements for all such payments.