Payment Methods in International Trade
Payment methods in international trade are brought up because today countries do not have the ability to produce all the products and goods they use within their internal borders. In some countries, the necessity of this issue is so much that they cannot survive without importing the required items. This situation brings governments into the field of export and import, and export and import also mutually involve the discussion of foreign exchange payments. In international business transactions, the money that the buyer pays to receive a product or service in return is done in different ways. Each exporter or importer in the field of international payments chooses a method that suits its economic and political conditions. In this way, it is freed from being caught in the swamp of unpredictable events.
Choose a Payment Method
Choosing one of the payment methods depends on the agreement between the parties. This choice can be influenced by several factors, such as:
The duration of cooperation between the parties and their level of trust.
Payment deadline and transaction amount.
The subject of the transaction.
Spatial distance and geographic location of the transaction parties.
The financial position and conditions of the parties, especially the buyer.
Political, social and economic situation and conditions of the parties.
International Payment Methods
As mentioned earlier, international payments depend on certain factors such as political and economic conditions and the level of trust of the parties, etc.
In general, in the world of international trade, we are faced with 4 payment methods, which are:
1- Pre-payment
2- Open Account
3- Collection Payment
4- Letter of Credit
1. Advance Payment Method
The implementation of this method requires the presence of some factors such as: the trust of the parties, the non-prohibition of commercial transactions between the exporting and importing countries, and the country of the buyer allowing him to pay the full amount at the beginning of the matter.
This method is risky in nature. Because in case of full payment of the transaction amount and receipt of the purchased item, the buyer may be faced with a defective or inconsistent item. In this case, the buyer will suffer a lot of loss, although in the current situation, it will be possible to minimize irreparable losses by obtaining appropriate guarantees.
2. Open Account Method
In terms of reliability, risk-taking and burden of responsibility, this method is just opposite to the per-payment method. In this method, the seller must fully trust the buyer. Because the goods will be sent and the ownership will be transferred to the buyer before the seller receives the money. In this situation, the seller must fully assure his buyer that he will pay the amount of the sent goods on the specified date and according to the contract.
However, since the risk of this method of payment is high comparing to other methods, there is also a legal solution for it; It means that the seller can send the goods in several stages and receive the amount in stages. It is noteworthy that the implementation of this method also depends on the internal laws of the governments of the parties.
3. Collection Payment Method
A) Documentary Method
In the documentary bill of exchange payment method, when the seller sends the goods to the buyer, he issues a bill of exchange to his own bank in the buyer’s country. Completion and adjustment of the bill of exchange is done in the same bank and it reaches the buyer through the same way. The bank receives the bill of exchange from the buyer and deposits it into the seller’s account. In terms of security, the bill of exchange is more reliable than the bill of exchange in the form of visual or term documents.
B) Collection Method
In this method, when the seller sends the goods to the buyer, he/she also issues a bill of exchange and submits it to his/her bank. The bank also sends the bill along with the payment order to the bank of the buyer’s residence.
4. Letter of Credit Method
This method is one of the best international payment methods. In this method, the retailer opens an account in the name of the seller by going to the bank and deposits the agreed amount into that account. On the other hand, the seller receives the amount by going to the bank and presenting the documents related to the account and deposit. This method is the most reliable method in international payments, although the process of doing it will be long.
Up To Sum
With the increase of economic transactions and the expansion of business relations at the international level, the discussion of foreign exchange payments and, accordingly, international payment methods are raised. The choice of each of these methods depends on the agreements of the parties and the existing economic and political conditions of their respective governments. However, in terms of security, especially for the country of Iran, which is always facing political changes, sanctions and murky international relations, using the Letter of Credit method is more logical and reliable.
