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Import
/ Export Payment Terms and Comparison
Open
account:
You ship, then forward your shipping documents directly
to your buyer and await payment.
C.A.D.
(Cash against documents):
You ship then forward your shipping documents to an
agent named by your buyer (may be a bank) who pays you
when authorized by your buyer.
Sight
draft or time draft (Documentary collections):
You ship, then use your bank as an agent to forward
shipping documents to your buyer through his bank. The
buyer's bank must obtain payment/promise of payment from
the buyer before releasing shipping documents.
Advised
letter of credit:
Before you ship you receive your buyer's bank's written
conditional obligation to pay you, usually upon
presentation of conforming shipping documents to the
buyer's bank after shipment.
Confirmed
letter of credit:
Before you ship you receive your buyer's bank's written
conditional obligation to pay you, which is further
"guaranteed" by a U.S. bank acceptable to you.
To be paid you usually present your conforming shipping
documents to the U.S. confirming bank.
Cash in
advance:
You receive cash from the buyer before shipping.
| Cash
In Advance |
After
Payment |
Before
Shipment |
Very
Low |
Maximum-Relies
on exporter to ship goods as ordered |
Letter
of Credit
Confirmed
Unconfirmed (Advised) |
After
Payment |
When
documents are available at shipment |
Very
Low |
Assured
of quantity and also quality at shipment
if inspection report is required |
| Documentary
Collection Sight Draft Documents against
Payment |
After
Payment |
On
presentation of draft to importer |
If
draft unpaid, goods must be returned or
disposed of, usually at loss |
Assured
of quantity, also quality, if goods are
inspected before shipment |
| Documentary
Collection Time Draft Documents against
Acceptance |
Before
payment |
On
maturity of draft |
Relies
on importer to pay draft |
Minimal！Can
check shipment for quantity and quality
before payment |
| Consignment |
Before
payment, exporter retains title until
goods are sold or used |
After
use; inventory and warehousing cost to
exporter |
Substantial
risk unless through foreign branch or
subsidiary |
Very
Low |
| Open
Account |
Before
payment |
As
agreed |
Relies
on importer to pay account as
agreed！complete risk |
Very
Low |
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Definition:
A documentary credit is a (conditional) bank undertaking
of payment. It is a written undertaking by a bank
(issuing bank) given to the seller (beneficiary) at the
request, and on the instructions of the buyer
(applicant) to pay at sight or at a determinable future
date up to a stated sum of money, within a prescribed
time limit and against stipulated documents or other
conditions. The issuing bank is putting out its credit
and good name for the sake of the buyer.
Buyer:
Because the documentary credit is a conditional
undertaking, payment is made on behalf of the buyer
against documents, which may represent the goods and
give the buyer rights to them.
Seller:
Because the documentary credit is a bank undertaking,
the seller can look to the bank for payment, instead of
relying upon the ability or willingness of the buyer to
pay.
However,
because the undertaking is conditional, the seller only
has the right to demand payment if he meets all the
requirements of the credit. It is, therefore, unwise for
the seller to proceed with shipment until he is aware of
these requirements and is satisfied he can meet them.
Summary:
Documentary credits therefore:
- Are an
arrangement by banks for settling international
commercial transactions.
- Provide
a form of security for the parties involved.
- Ensure
payment, provided that the terms and conditions of
the letter of credit have been fulfilled.
- Mean
that payment by such means is based on documents
only, and not on merchandise or services involved.
Merchandise,
Commercial, Trade:
The majority of LCs issued are in payment for goods in
shipment or current services performed. Payment is
normally made against documents for goods shipped.
(Article 1&2, UCP 500)
Standby:
Normally, this type of LC functions like a guarantee.
This type of credit can be drawn against only upon
performance of service or financial obligation default.
It is a definite undertaking of the issuing bank.
Similar to commercial LCs, standby's are governed by the
International Standby Practices 1998. (ISP98)
Revocable:
A revocable letter of credit may be amended or canceled
by the issuing bank at any moment and without prior
notice to the beneficiary. (Article 6 & 8, UCP 500)
Unconfirmed:
Bears only the obligation of the issuing bank. The
beneficiary should look to the credit worthiness of only
the issuing bank, and not to any intermediary. (Article
9, UCP 500)
Confirmed:
Is a credit in which a second obligation is added to the
letter of credit by another bank. (Article 9, UCP 500)
Sight:
Payment is at sight, which means that the drafts and
documents are honored, if in order, by making payment
without delay.
Time,
Usance:
The draft honored by accepting it for payment at a
future date. Payment is delayed until the maturity of
the draft.
Transferable
credit:
Can be transferred by the original beneficiary to one or
more other parties. It is normally used when the first
beneficiary does not supply the merchandise himself, but
is a middleman and wants to transfer all or part of his
rights to the actual supplier. (Article 48, UCP 500)
Be Sure
to Verify:
- Correct
name and address
- Sufficient
credit amount
- Documents
required are obtainable and according to terms of
sale
- Points
of shipment and destination are correct
- Insurance
coverage requirements are obtainable and according
to terms of sale
- Shipping
date allows sufficient time to dispatch goods
- Expiration
date allows sufficient time for presentation of
draft and documents
- Description
of goods is correct and simply stated
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