There are maily three categories of payment in international trade: remittance,
collection and the L/C.
Remittance service is often used for advance payment, cash on delivery, open account,
down payment, payment in installments and commission, etc. It can be made by mail,
telegraph and draft, namely Mail Transfer or M/T, Telegraphic Transfer or T/T and Demand
Draft or D/D respectively. The cost of M/T is less, but the speed is slow. As far as D/D
is concerned, it is transferable, which is different from M/T and T/T.
Simply speaking, it is a method by which the exporter authorizes the bank to collect
money from the importer. Collection is of two types: Documents against payment-the
documents are handed over to the buyer against immediate payment. According to the
different time of payment, it can be further divided into D/P at sight and D/P after
sight.
Documents against Acceptance-the documents are handed over to the buyer
when the buyer has assumed liability to pay for goods by the dates specified in the Bill
of Exchange.
The most generally used method is the letter of credit, which is a reliable and safe
method of payment, facilitating trade with unknown buyers and giving protection to both
sellers and buyers.
A L/C is a written undertaking by the issuing bank (for the importer) to the
beneficiary (the exporter), under which the bank undertakes to pay the beneficiary the
money within a designated time period and against any stipulated terms and documents. Most
of international trades make use of this method. It is based on bank credit.
The cost of L/C is very expensive, especially for the importer, which has to pay
deposits to the issuing bank for opening the L/C.