Av. Ayşe Özge ÖZKURT

Payment Methods in International Trade

PAYMENT METHODS IN INTERNATIONAL TRADE

While payment methods used in international trade vary depending on the relationship established between importing and exporting firms, factors such as the delivery of the sold goods to the buyer, payment of the goods' value, and commercial risk differ according to the transactions mutually agreed upon by the parties. In this process, the issue of which party will predominantly bear the commercial risk is connected to the established commercial relationship and certain obligations arising from that relationship. Although fundamentally both the buyer and seller act with the aim of trading without taking risks, various forms of payment have been developed for use in international trade, considering that every choice made directly or indirectly regarding the commercial relationship will also have a cost.

Therefore, it is obvious that various payment methods will entail different responsibilities and risks for importing and exporting firms. Naturally, the preference of all firms that are the subjects of the commercial relationship tends primarily towards choosing payment or transfer methods that secure themselves.

Cash in Advance (Prepayment): The payment method where the entire payment is made by the importing firm before the shipment of goods is called cash in advance. In this method, besides all kinds of accident and loss risks that may occur during the transfer of goods, all risks related to transportation, such as delivery times of the goods, also belong to the importing firm. Since the payment method and all risks in the transfer process are loaded onto the importing firm, it is not a very preferred payment method today.

Cash Against Goods (Open Account): The importer pays the goods' price to the exporter after receiving the goods. The exporter ships the goods on behalf of the buyer and subsequently sends the documents representing the goods to the importer either directly or through a bank on a free-of-delivery basis. Contrary to cash in advance, since it is the payment form where the exporter undertakes the most risk, it is not widely preferred today.

Cash Against Documents (Documentary Collection): It is a payment form that enables the delivery of shipping documents representing the goods to the importer via a bank, in exchange for the collection of the goods' price, after the exporter has shipped the goods in line with the sales contract made with the importer. This payment form is a quite safe method for the importing firm as it allows them to take delivery by verifying the goods. However, in this case, possibilities exist such as the importing firm not accepting the goods and not making the payment by not taking the documents for various reasons. The exporting firm will have to incur additional expenses to bring back the goods not taken by the importing firm, and therefore the cost item will increase. It should be stated that it is a method preferred by importing and exporting firms as it has the potential to be a cheap and fast payment form depending on the commercial relationship established between the firms and the trust relationship built within this scope.

Acceptance Credit: The distinguishing feature of this method is determining, through a contract to be established between importing and exporting firms, that the prices of the goods planned to be imported will be paid a certain time after the shipment of the goods is carried out. In this form of payment, there is a policy or draft (bill of exchange) that commits to paying the goods' price at a certain maturity date and also guarantees this payment at that time.

Letter of Credit (L/C): It is realized by a bank, authorized by the importing firm with an instruction, completing agreements with the exporting firm that will fulfill the conditions demanded by the importing firm for a certain amount or until a determined maturity date. All documents regarding the transfer and delivery details of the goods to be exported by the exporting firm are delivered to the importing firm by the authorized bank. The importing firm commits to the payment it will make to the exporting firm with these delivered documents or drafts. Since the importer and exporter carry out the necessary transactions through a bank and are under the financial assurance of a bank, the Letter of Credit payment form provides advantages for both firms.