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Payment Methods - Coggle Diagram
Payment Methods
Open Account
Definition
Open account means the exporter ships the goods to the buyer and just waits till a fixed date as agreed in their contract for payment from the buyer. Normally, the exporter only accepts open account method of payment if he has known the buyer quite well and they have established a long-term and trustworthy business relationship
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Advantages
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Importer's Perspective
Lower Financial Costs: No need for letters of credit or bank guarantees, saving fees.
Improved Cash Flow: No upfront payment, allowing better liquidity management
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Disadvantages
Exporter's Perspective
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High Non-Payment Risk: Importer may delay or fail to pay, leading to financial losses.
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Importer's Perspective
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Possible Credit Limit: Exporters may set a credit cap, limiting large purchases.
Letter of Credit (L/C)
Definition
A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.
Types of L/C
Irrevocable L/C: A letter of credit that cannot be canceled nor amended without agreement of all parties
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Revocable L/C: A letter of credit that may be canceled at any moment without prior notice to the beneficiary
Transferable L/C: A letter of credit that can be utilized by someone designated by the original beneficiary
Advised L/C: A letter of credit issued by a bank and forwarded to the beneficiary by a second bank in his area. The second bank validates the signatures and attests to legitimacy of the first bank
Revolving L/C: A letter of credit calling for renewed credit to be made available when the issuing bank informs the beneficiary that the buyer has reimbursed the issuing bank for the drafts already drawn
Standby L/C: A letter of credit that can be drawn against, but only if another business transaction is not performed
Back to back L/C: Two letter of credit with identical documentary requirements, except for the difference in the price as shown by the invoice and draft
Confirmed L/C: A letter of credit issued by one bank to which a second bank adds its commitment to pay
Deferred payment L/C: A letter of credit under which the documents are forwarded to the importer's bank, while sight draft is presented at a latter future date
Documentary L/C: A document issued by a bank, whereby the bank replaces the buyer as the paying party. The exporter is basing his risk of getting paid on the bank rather than on the importer. The bank will have to be reimbursed by the importer
Advantages
Importer's Perspective
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Clearly defines transaction terms, reducing misunderstandings.
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Exporter's Perspective
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Specifies clear transaction terms, ensuring predictable payment conditions
Provides payment security, reducing the risk of non-payment
Disadvantages
Importer's Perspective
May not cover every aspect of the transaction, leading to potential risks.
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Exporter's Perspective
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Requires strict compliance with terms, which may lead to delays or disputes.
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