I will be covering various types of trade payments in this and coming articles
As has been stated earlier trade can happen through any of the following methods
a. Advance payments
b. Collections
c. Letters of Credit
d. Bank Guarantees / Standby Letters of Credit
e. Consignment / on account sales
Advance Payments
As the name indicates this simply denotes cash-and-carry type of trade. The purchaser / importer has to remit the funds in advance to the seller / exporter for goods to be transported on realization.
i. Purchaser is new in business
ii. Purchaser does not have any track record with the seller
iii. Purchaser approached the seller directly and does not have any references to whom
seller can relate to
iv. Demand for goods is more than the supplies
v. Purchase amount is small and is not viable for other modes of trade payments
vi. The product is so customized / specially manufactured that finding other buyers is very difficult
The advantage of this method of payments is that there are no hassles and additional costs like interest loading on credit period etc.
Sellers / Exporters holds the maximum advantage in this kind of trade. They receive the payment in advance and can transport the product afterwards. We have often observed that the buyer sends the remittance in advance and receives the goods only after a gap of nearly 90 – 180 days. This means the seller starts manufacturing the goods only after receipt of funds.
Buyer / Importer will be at a disadvantage. He has to part with the money upfront and wait for the receipt of goods. Even then there is no guarantee that he will be receiving the goods of the same quality and quantity and upto his specifications. There are instances where the importers were cheated by fly-by-night operators. Though they can resort to arbitration and legal avenues for settlement of disputes and claims, they will be very costly and most often the buyer has to engage somebody in the country of the seller for resorting to these remedies. One more avenue available to the buyer is to demand the seller to forward a guarantee from a reputed Bank in the country of the seller or a guarantee from a banker in his own country that the goods will be supplied against the advance remittance and on failure to supply can demand payment under the guarantee. In all such cases the seller will demand the cost of guarantee (bank commission etc) over and above the invoice value.
However this may not work in cases iv, v or vi above as the seller holds all the advantages and may not be ready to provide a guarantee of this type. Also if the seller is highly reputed while the buyer is very small trader then also their demand for a guarantee will not work.
