Terms of Payment
Terms of Payment
TOOL
ANKIT VERMA
M B A ( IT L M ) II Y R.
I N T E R N AT I O N A L
LO G IS T ICS
REG. 1804305004
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CONTENT
Introduction
Factors determines the terms of payment
Methods of payment
Effect on country’s growth
Conclusion
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INTRODUCTION
When it comes to trading of commercial goods, there is always a certain level of risk and trust
involved. Whether you’re a buyer or seller, you are bound to be exposed to some risk when
dealing with international transactions. In large part, the amount of risk involved highly depends
on the method of payment you use.
There are plenty of international paying methods for importers and exporters across the globe.
And as the world continues to globalize, we’re seeing an increase in international payment
modes. But as with incoterms the parties lying at the split ends of the spectrum have clashing
agendas and priorities to fulfill and to look out for.
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FACTORS DETERMINE THE TERMS OF PAYMENT
1. Exporters knowledge of buyers.
2. Buyer’s financial ability
3. Degree of security of payment, if advance payment is not considered.
4. Speed of Remittance.
5. Competition faced by exporters.
6. Legal issue
7. Difficulty of payment
8. Mistrust
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METHODS OF PAYMENT
Cash in Advance
Letters of Credit
Documentary Collections
Open Account
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CASH IN ADVANCE
The buyer completes the payment and pays the seller in full before the merchandise it shows a
significantly high risk for buyers as it produces a disadvantageous cash flow and no definite guarantee of
receiving the goods or the condition in which they arrive. This is generally a recommended option for
sellers who are dealing with new buyers or buyers with weak credit ratings, and/or for high-valued
products.is delivered and shipped off to the buyer.
Pros Cons
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LETER OF CREDIT
A documentary credit or bankers commercial credit, or letter of undertaking, is a payment
mechanism used in international trade to provide an economic guarantee from a creditworthy
bank to an exporter of goods.
Pros Cons
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DOCUMENTARY BILL
Documentary collections is a process in which both the buyer’s and seller’s banks act as facilitators of
the trade.
The seller submits documents needed by the buyer, such as the Bill of lading, which is necessary for
the transfer of title to the goods, to its bank.
Pros Cons
Buyer
→ More economical than → Reliance on seller to
Letters of Credit ship goods as specified
Seller
→ No verification involved
→ No guarantee of
→ Minimal payment from bank
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OPEN ACCOUNT
Under Open Accounts (also known as Accounts Payable),merchandise are shipped and delivered
prior to payment, proving to be an extremely attractive option for buyers especially in terms of
cash flow. On the other end of the spectrum, however, sellers are faced with high risks. After the
payment, the seller ships the goods to the buyers with a credit period attached. This is usually in
30-, 60-, or 90-day periods, during which the buyer must carry out full payment.
Pros Cons
Buyer
→ Receives goods before
payment is due → Minimal
→ Positive cash flow
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EFFECT ON COUNT’S GROWTH
Terms of payment plays a vital role and varies globally. Where payments are negotiable
between the importer and exporter by attractive terms of payment not only by cost or quality
basis but a best deal.
Payment terms are determined by the host of factor as the regulation of the countries, financial
competence of the exporter, monopolistic product condition and rest all other bargaining strength
of the parties
As per the exchange control regulation at a global level, the full value of exports proceeds,
must be received within six months from the date of shipment.
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CONCLUSION
Terms of payment plays a vital role for International Business.
Where payments are negotiable between the importer and exporter by attractive terms of
payment not only by cost or quality basis but a best deal. So, the sale terms influence not only
credit terms but also credit must be extended to the exporter to facilitate successful transaction.
Some where, credit may extends by letter of credit, open account & so on buying raw materials or
manufactured goods for export.
Here exporter transactions are deemed to complete only when the exporter proceeds are fully
received by the importer.
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Reference
www.worldbank.org › results › 2018/04/03 › stronger-open-trade-pol...
Text Book – C. Ramgopal Verma
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THANKYOU
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