Payment methods in foreign trade are structured based on the rules of the International Chamber of Commerce (ICC). The choice of payment method determines the degree of risk, control, and security for both the buyer (importer) and the seller (exporter).
1. Most Frequently Used Payment Methods
Advance Payment
Payment Against Goods
Payment Against Documentation
Letter of Credit Payment
2. Other Payment Methods
Bank Payment Obligation (BPO)
Acceptance Credit Payment
Payment by Consignment
Payment with Buyer Pre-financing
Open Account Payment
Counter Trade
On Debit Payment
3. Letter of Credit (L/C) Payment Method
A letter of credit is a commitment by the buyer’s bank to pay the exporter, provided that the terms of the L/C are fully complied with. It minimizes payment risk for both sides.
Step-by-Step Process
| Step | Description |
|---|---|
| 1 | Contract signed between Buyer (Importer) and Seller (Exporter) |
| 2 | Buyer instructs their bank to issue an L/C |
| 3 | Importer Bank (Issuing Bank) issues the L/C |
| 4 | L/C transmitted to Exporter’s Bank (Correspondent Bank) |
| 5 | Exporter receives L/C Notice |
| 6 | Exporter ships the goods |
| 7 | Exporter submits documents to its bank |
| 8 | Exporter’s bank sends documents to the issuing bank |
| 9 | Issuing bank reviews and forwards documents to the buyer |
| 10 | If compliant, the issuing bank transfers payment to exporter’s bank |
| 11 | Exporter’s bank pays the exporter |
| 12 | Buyer makes payment to the issuing bank (reimbursement if not prepaid) |
| 13 | Buyer clears the goods from customs |
4. Advance Payment Method
In this method, the buyer pays in full before the shipment. The highest risk lies with the importer.
Process
| Step | Description |
|---|---|
| 1 | Contract signed between Buyer and Seller |
| 2 | Buyer transfers payment to Importer Bank |
| 3 | Importer Bank sends funds to Exporter Bank |
| 4 | Exporter Bank makes payment to Seller |
| 5 | Seller ships the goods |
| 6 | Documents sent to Buyer |
| 7 | Buyer clears goods through Customs |
5. Cash Against Goods (CAG) Payment Method
Also known as “Payment on Delivery”, payment is made after the goods are received. Risk is higher for the exporter.
Process
| Step | Description |
|---|---|
| 1 | Contract signed |
| 2 | Seller ships the goods |
| 3a | Seller prepares and sends documents to Exporter Bank |
| 3b | Exporter Bank sends documents to Importer Bank |
| 3c | Importer Bank notifies Buyer |
| 4 | Buyer clears goods through Customs |
| 5 | Buyer makes payment to Importer Bank |
| 6 | Importer Bank transfers funds to Exporter Bank |
| 7 | Exporter Bank pays Seller |
| 6 | Documents are delivered to Buyer after payment |
6. Payment Against Documents (PAD) Method
Here, banks act as intermediaries for document and payment exchange. The exporter retains control until payment is made.
Process
| Step | Description |
|---|---|
| 1 | Contract signed |
| 2 | Seller ships goods |
| 3 | Seller sends shipping documents to Exporter Bank |
| 4 | Exporter Bank forwards documents to Importer Bank (Advising Bank) |
| 5 | Importer Bank notifies Buyer |
| 6a | Buyer inspects and pays to Importer Bank |
| 6b | Importer Bank releases documents to Buyer |
| 7 | Importer Bank transfers payment to Exporter Bank |
| 8 | Exporter Bank pays Seller |
| 6 | Buyer clears goods with documents at Customs |