Comparison of Payment Methods

Assess the pros and cons of Payments in Advance, Open Account Payments, Documentary Credits and Documentary Collections.

Four key ways to make payments

The main difference between these payment methods is the level of risk faced by the importer and exporter:

  1. Payment in Advance – before goods are shipped

  2. Open Account Payment – after goods are shipped or received

  3. Documentary Credits – payment is guaranteed by a bank subject to the fulfilment of certain terms and conditions by the importer and exporter

  4. Documentary Collections – payment is handled by banks acting as agents for the importer and exporter

Quick Guide to choosing a Payment Method

Payment in Advance

Documentary Credit

Documentary Collection

Open Account Payment

Bank Charges

Low

High

Medium

Low

Payment Risk

Exporter has concerns over the ability and willingness of importer to pay

Payment is guaranteed by issuing bank if terms of credit are met

Payment risk unchanged but mitigated by control over goods

Exporter is comfortable with the reliability of the importer to pay

Country Risk

High

Exporter requires payment before shipment

High

Exporter requires confirmation from a bank in a low risk country

Medium

Exporter mitigates risk by using the banking system to retain control over the goods by holding on to title documents

Low

Does not mitigate country risk in any way

Credit Facilities

Not required

Required

Not required

Not required

CashFlow

Importer has a good cash position Exporter needs cash as early as possible

Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay

Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay

Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay

Price

Importer may be able to negotiate a discount

Price may be lower in exchange for added security of bank guarantee

Effect on price depends on collection terms

Importer may pay a premium for supplier credit

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