There’s a lot of unguessable terminologies related to the Commerce &International trade such as Bill of Exchange, Collection Basis et cetera. A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. Negotiable B/L in other words. Bill of exchange are similar to checks and promissory notes.(Ref: Investopedia) Now, you probably are wonder what Promissory notes means. Many of you guys probably are unfamiliar with trade terminologies just like me.
Bonsystems Global is going to introduce informative international trade information with simple and easy explanation. First topic is Terms of Payment in Trade. If you read this article, you will understand how differ the general transaction and international trades are in terms of payment conditions and payment timing.
What is Trading? And what terms and conditions may apply to this?
In the general sense, transactions are made by consumers who pay first and exchange to the products or service value. However, the meaning of transactions is slightly different when it comes to commercial trading(transactions). In international trade, the terms of trade settlement changes depending on each counterparty and the items that they trade. Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller. (Ref: Investopedia) It is common to specify the terms of trading conditions in the contract in advance. All sorts of terms conditions related to trade activities such as shipping detail, product quantity, product quality assurance, price etc. are detailed on the
contract. The shipping document contains ownership exchange point, and responsible counterparty for the shipping cost. Documentation related to clearing &settlement present when to settle the balance, and how to pay.
The reasons why the actual settlement date varies in Trade
Let’s talk about the timing of the payment. I mentioned earlier that the general transaction and trade transaction are different.
These differences are occurred by three main reasons. 1) Uncertainty of product quality; customer(importer) can’t guarantee the quality until they actually receive it. 2) Bulk purchasing; the trading amount and volumes are larger than individual transaction. 3) Difficult to resolve the dispute; trade is occurred between inter-countries, so the cost and time of shipment is huge.
Different types of Payment Terms in International Trade
Terms of payment in trading is divided into Advanced payment, Simultaneous payment (Documentary Collections), and After payment. Advanced payment is a type of payment where the buyer pays the seller upfront before the goods are shipped. Simultaneous payment means exchange documents against payments. After payment means exporter shipped and delivered the goods before the buyer settle the balance.
Based on INCOTERMS 2020 regulation, the responsibility on the products and shipment can be both buyer and seller depending on the contract condition. In some conditions, even thought, the product has already landed on the buyer’s country, the seller still have a responsibility on goods depending
Well-known method of advance payment: T/T in advance
T/T(Telegraphic Transfer) is a way of payment where the importer requires the bank of the importing country to transfer the price to the bank account of the exporter. If the “in advance” condition is attached, the bank of the importing country contacts the bank of the exporting country and must make the payment prior to receiving the items. It could burden the importer about the quality of items, or the items being delayed.
Well-known method of concurrent payment: D/P
D/P(Documents against Payment) is one of the collection methods for document delivery. The word “collection” was very convoluted to me, it is a way of payment in which the seller requests to make payment first. The importer exchanges the shipping document and price after the exporter loads the items, sends the shipping documents and request to make the payment.
Although its payment is made later than the advance payment, it could burden the importer of making the payment prior to selling the items.
Well-known method of post-payment: D/A
D/A(Documents against Acceptance) is document acceptance terms and similar to the D/P. It’s a way of collection methods in which the exporter demands payment through banks. However, the importer makes the payment when its documents expire after receiving the documents. This is a condition that the exporter feels burdened since payment is not made even though shipping has been completed. The exporter might not be able to make its money back if the importer goes bankrupt before the date of payment.
The payment conditions are subject to reliability of the company, and also the product features. For example, the products like machines or plants, which hard to see the faulty visually are settle the payment after receiving the product.
Today, we briefly covered different payment conditions with related examples. I hope this article was helpful to you and see you next time with another topic!