| Method |
Time of Payment |
Goods Available
To Buyer |
Risk To Seller |
Risk To Buyer |
|
CASH IN ADVANCE |
Before Shipment. |
After Payment. |
None if funds are "good", or
collected & available in the seller's bank account. |
Relies completely on seller to
ship the proper goods; Assumes the political and economic
risks. |
|
LETTER OF CREDIT |
|
|
|
|
| 1. Sight Draft
|
Upon presentation of conforming
documents to the negotiating bank. |
After payment unless directly
consigned to the buyer (seller surrenders possession). |
Very little or none, depending on
terms of the letter of credit. |
Relatively low in terms of whether
shipment has been made. Relies completely on the seller to
ship goods described in documents. |
| 2. Time Draft |
After shipment presentation of
required documents, and bank's acceptance of draft due on
specified date. Draft may or may not be discountable. |
Usually after the bank's promise
to pay is established, but before payment. |
Very little or none, depending on
terms of the letter of credit. |
Relatively low in terms of whether
shipment has been made. Relies completely on seller to
ship goods described in documents. |
|
COLLECTION |
|
|
|
|
1. Sight Draft
Document Against Payment, D/P |
Usually soon after the local bank
notifies the buyer of receipt of documents. |
After payment, unless directly
consigned to the buyer (seller surrenders possession). |
Many risks such as buyers integrity
and standing and political and economic instability. |
Relatively low in terms of whether
shipment has been made. Relies completely on seller to
ship goods described unless the buyer is allowed to
inspect goods before payment (rare). |
2. Time Draft
Document Against Acceptance, D/A |
Expected on the maturity date of
the draft. |
Before payment, but after the
buyer accepts the draft. |
Reliance on the buyer to pay the
draft when due. Other risks are the same as for a sight
draft, except the goods have already been released. |
Relatively low in terms of whether
shipment has been made. Relies completely on seller to
ship goods described unless the buyer is allowed to
inspect goods before payment (rare). |
|
OPEN ACCOUNT |
As agreed. |
Before Payment. |
Seller relies completely in the
buyer to pay the account as agreed. Political and economic
risks. |
None. |
