Methods of Payment

There are three basic methods of payment in foreign trade but traders usually use the one which is customary in their business.
1 Payment against documents. The shipping documents are exchanged with the bank representing the importers. There are two procedures: Documentary Bills and Documentary Letters of Credit. The latter is the commonest method of payment.
2 Payment into an open account. This is used where there is complete trust between seller and buyer. Also there must be no political or currency problems. The exporters simply airmail the shipping documents to the importers who settle their account monthly or quarterly.
3 Cash in advance. This is used only for small orders sent by parcel post.
Whatever method is used, the sellers have to check the credit status (financial strength) of the buyers. Also in cases of very big contracts, government finance is used.

D Foreign Bills of Exchange
A lot of foreign trade is paid for using Bills of Exchange so it is necessary to understand what a Bill of Exchange (see page 89) is. Basically it is a credit instrument or a piece of paper which can be turned into money later.
The exporters write a draft to the importers. The draft is a note, like the one shown opposite, telling them to pay a certain amount of money to a third party. The exporters are the drawers of the draft, the importers, the drawees and the third party to whom the draft should be paid, the payees.
The drawees agree to pay the draft at the time when it becomes due, that is say, 120 days after sight and the draft has to be accepted by being signed. But if a company of importers accepted the draft with their Signature on the back, it would not have much value, because their name and the state of their finances might not be valued highly. So the draft has to be accepted by a well-known bank representing the importers. This turns the draft into a Bill of Exchange which is sent to the payees, who are either the exporters or their bank. The payees know by the signature of the bank on the back, that the Bill will in fact be paid at maturity (60, 120 or 180 days after sight, the day the draft was accepted).


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