Payment methods in foreign trade are internationally valid payment methods applied at the stages of payment of the cost of the goods by the importer and shipment by the exporter in an export transaction. Payment methods are through banking practices and can be freely chosen by traders with mutual agreement. There are a number of differences between payment methods. There are basically 6 payment methods with different risk values from the point of view of importers and exporters. It is very important to choose the safest among these payment methods. In order to avoid possible risks, it is useful to obtain up-to-date information from various sources on both the buyers themselves and the legislation of the country referred.
Payment methods in foreign trade are internationally valid payment methods applied at the stages of payment of the cost of the goods by the importer and shipment by the exporter in an export transaction. Payment methods are through banking practices and can be freely chosen by traders with mutual agreement. There are basically 6 payment methods with different risk values from the point of view of importers and exporters:
- Cash Payment
- Payment Against Goods
- Payment Against Documents
- Payment With Acceptance Credit
- Payment by Letter Of Credit
If we look at the prevalence in Turkey; According to the Foreign Trade data bulletin in April 2020 Payment Methods announced by the Ministry of Commerce, the most preferred method in exports is “Payment Against Goods” (5 billion 424 million dollars), the second is “Cash Payment” (1 billion 536 million dollars) and the last one is “Payment Against Documents” (736 million dollars). According to the distributions in another report announced in 2019, “Payment Against Goods” is the most dominant method among the preferred payment methods with a share of 66% compared to the general. “Payment Against Documents” has a 12.5% share and “Cash Payment” has a 12% share.
Considering the preferred payment methods in imports, imports are most commonly made by the method of “Payment Against Goods” (7 billion 330 million dollars). Then come the methods of ”Cash Payment“ ($2 billion 918 million) and ”Payment by Letter of Credit” ($823 million). Again, according to the table in the report in 2019, “Payment Against Goods” has the highest preference rate of 52%, while “Cash Payment” has 29.1% and “Payment by Letter of Credit” has 6.6%.
Advance Payment
Cash Payment is a form of payment that the importer pays for the cost of the goods in a foreign trade transaction before the goods are shipped to the exporter. It is usually seen that this method is preferred for goods that are in the seller’s monopoly or have a high level of demand in the market.
Cash export fees may be collected through banks or by check and effective to the buyers themselves or to the declared third parties, or by credit card if the foreign currency seller is resident abroad or if the credit card is obtained from abroad. The seller who receives the payment then sends the goods. Documents are sent between the parties, documents are not given to banks.
There is no internationally valid rule governing cash payment. The cash payment method is the most advantageous and risk-free foreign trade payment method for exporters. Although it may be attractive for importers due to discount opportunities, it is the riskiest payment method due to possible situations such as the fact that the goods do not meet the order or are not sent on time.
Goods Against Payment
In Turkey, the most common preferred in both export and import transactions, also known as “open account”, this method has the opposite flow of cash payment. The importers pay the cost of the goods they receive after the goods have been shipped or after receiving the goods. The export price is delivered to the exporter through the banks, while the documents are sent between the parties in the same way as the cash payment, the documents are not given to the banks. There is no international rule regulating the payment against goods method as in cash payment. It is the payment method that carries the least risk for the importer, as payment will occur after the delivery of the goods. It is the method that poses the highest risk for the exporter, as the exporter may face situations such as non-payment, late or incomplete.
Payment Against Document
Unlike cash payment and payment against goods, banks are actively involved in the payment process. After the first contract of sale, the exporters make the shipment of the goods and then deliver the loading documents to their bank. The bank that receives the documents sends the loading documents to the importer’s bank. The Bank of the importer, who receives the loading documents, delivers the documents to the importer in exchange for payment or with a commitment to payment term, and the importer can only remove the goods from customs with these documents. Thus, the exporter makes sure that the importer cannot receive the goods without payment. Therefore, it means “payment against documents”, that is, “payment in return for loading documents”. In the payment against documents, while the payment comes to the exporter through the banks, the documents are delivered to the importer through the banks and a commission is charged. Although there is a safer payment method for the exporter than the corresponding payment against goods, banks do not have a payment commitment in the process. There is also the possibility that the importing company will not receive the documents sent from its bank, which is one of the biggest risks for the exporter.
Payment With Acceptance Credit
Payment With Acceptance Credit is an unconditional payment method in which the importer undertakes to pay the cost of the goods in a certain term and this payment is a means of a policy accepted by the bank. This credit can be used provided that the policy presented together with the certificate is accepted by the importer or, in addition, the importer’s bank. Documents belonging to the shipped product are transmitted through banks and delivered to the importer in exchange for acceptance of the policy. After receiving the goods, the importer makes the payment in the specified term, so that the importer is provided with ease of financing in terms of the period. The exporters, on the other hand, guarantees themselves with the acceptance of the policy by the bank. A bank commitment is formed in the payment with acceptance credit, so banks get a commission from this transaction.
Payment by Letter of Credit (Letter of Credit)
It is a commitment that guarantees that the cost of the goods will be paid by the bank in return for the fulfillment of the documents by the exporter within the conditions and time specified by the letter of credit opened by the importer’s bank upon the request of the importer. The buyers and sellers use this form of payment to ensure that the agreement is of the desired nature through the banks. When the appropriate certificate is presented, the exporters make sure that they will receive the payment, and the importers will receive the goods as they want. Its stages are:
- First of all, the exporters and the importers agree on terms and sign a sales contract. With this contract, the importers give instructions to their bank for opening a letter of credit.
- The bank examines the conditions of the letter of credit requested to be opened, if deemed appropriate, the importers’ bank (supervisor) opens the letter of credit.
- The bank of the exporters (notice) sends the opened letter of credit to the exporters, if the exporters are positive for them, it makes the shipment under the letter of credit and transmits the loading documents to the importers’ bank through their own bank.
- Documents are checked by the importers’ bank, they deliver documents to the importers in exchange for payment from the importers, the importers can also pull the goods through customs with these documents.
- Finally, payment is delivered to the exporters via the notification bank.
In summary, the exporters receive the payment only if they provide the goods under the specified conditions, and the importers make the payment only if the goods are suitable. However, although the letter of credit is a risk-balanced payment method for exporters, it is not preferred by companies unless it is compulsory due to its commissions and complex structures.
Banks take a risk in the payments by letter of credit, in return, a commission is requested from both sides and this amount is higher than the commissions in the payments against documents.
BPO (Bank Payment Obligation)
The lower the risk for the buyer and seller in payment methods, the more operational difficulty and cost increase in direct proportion. For example, although it reduces the risk for the parties when the letter of credit payment method is preferred, the necessary operational burden and cost increase with it. BPO (Bank Payment Obligation) is the latest payment system developed by banks in order to reduce risk in payment methods where there is no bank commitment. In the BPO system, documents are physically sent to the importer by the exporter, and the data contained on it are transferred to the exporter’s bank in a digital environment. As a result of electronic matching of the data presented by the seller through the bank, the bank undertakes to make the payment in a specified term. In other words, it can be compared to the combination of the guarantee of the letter of credit and the corresponding goods. In theory, the operation of the system seems like a letter of credit, but the operation is done online, not through documents. However, BPO, the first version of which was published by the International Chamber of Commerce in 2013, does not yet have a significant share among Turkey’s foreign trade payment methods when looking at 2020 data. Exporters should insist on choosing the most appropriate method for their own safety in payment methods. In order to avoid possible risks, it is useful to obtain up-to-date information from various sources on both the buyers themselves and the legislation of the country referred. Especially in foreign markets, exporters should choose the option to insure the goods they export, even if a mutual agreement has been reached, and create a guarantee in case the price is not paid. For detailed legislation on the forms of collection in foreign trade, we recommend you to look at the export circular document published by the Ministry of Commerce.
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