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These days, business partners, and sellers of goods and services use a variety of methods to transfer the value of goods or services purchased. The reason for this diversity in payment is the appropriateness of the type of payment with the conditions of the parties to the contract, the terms of payment agreed in the contract to guarantee the rights of both parties and also the ease of payment. To acquaint the reader with the 3 most common payment methods, a brief description of them is given below.

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One of the most common methods of payment internationally is the payment of goods in cash. In this payment method, the buyer delivers the goods according to the agreement, either as a whole amount or in several parts at the place agreed with the seller, and receives a payment receipt from the seller. In this payment method, the seller undertakes to provide the buyer with a receipt for the whole money or a percentage of it (according to the agreement) and to consider the amount paid in fulfilling his contractual obligations.

In this method of payment, the seller has no risk while the risk of the buyer is high. This method of payment is used only for businesses that either deliver the goods instantly or both parties have a very high knowledge and trust in each other, which are considered business partners.

Bank Transfer

The cash payment method is not suitable for all buyers using this method requires a lot of mutual trust, so another option available to buyers is to use a bank transfer.

In this payment method, the buyer deposits the number of goods according to the agreements made, to the seller’s account number that is given to him. This payment can include the total amount of the goods or part of it, but it must be following the agreements made in the contract.

After the deposit, the buyer asks the seller to confirm the receipt of the value of the goods by providing proof of payment of the agreed amount. Payment by bank transfer can be the beginning of the contractual obligations of both parties or the end of them. In this method, if the payment of the value of the goods is the prelude to the commencement of contractual obligations, the risk of the buyer will be high. But if the value of the goods is paid after receiving it, the risk of the seller will be high. By the way, the agreement between the parties determines everything. The seller or the buyer can receive a guarantee from the other party in return for the risk they accept.

Letter of Credit

Another payment method of paying the value of the goods is to open a letter of credit in the bank agreed upon, by the buyer for the seller. The seller can cash the letter of credit only if 1. All the shipping documents requested by the bank – agreed upon at the time of opening the letter of credit – are provided. 2. It is time to cash the documentary credit. All these conditions can be part of the agreement between the two parties before the opening of the letter of credit. Besides, the buyer can request more documents to ensure the match of the goods sent by the seller with the goods agreed in the contract, by way, the placement of these documents while paying by letter of credit must be based on the agreement between the two parties and before the opening of LC.

If there are prerequisites for the letter of credit, it is called the non-operational letter of credit and it can be cashed only when the mentioned conditions are met. However, if the letter of credit has no preconditions, it is called an active letter of credit.

By accepting the LC, the seller eliminates the risk of non-payment by the buyer. On the other hand, the buyer ensures that the seller will send the goods. In brief, this method of payment balances the risk.

Documentary credit has many different types based on the terms of use, each of them can be used to suit the conditions and desires of traders around the world.

Types of conditions available for documentary credit

  1. Timely letter of credit
    • At Sight LC: In the case of At Sight LC, after seeing the shipping documents, the bank will pay the seller, if all the agreed conditions that agreed when opening the letter of credit with the bank, are met.

  • Deferred Payment LC: In Deferred Payment LC, the bank pays the value of the goods on the date specified in the initial agreement, if all the documents are provided by the seller and all conditions are met.
      • Usance LC: Usance letter of credit is a type of Deferred Payment LC, with the difference that the bank issues a Clean Draft for the seller in exchange for the deadline that the seller gives to the buyer, which this Clean Draft can be transferred to others in the market.
  1. Irrevocable LC: In this letter of credit, the buyer and the issuing bank can change the initial credit conditions only in case of the seller’s agreement.
  • LC in terms of transferability to others
  • Transferable LC: This letter of credit can be transferred to others. Transferability is an advantage for the seller. Let me illustrate this with an example. Assume that the type of LC opened is time-dependent LC and that it is not yet time to cash the letter of credit. On the other hand, the seller for any reason needs to receive money for the goods sold. In this case, by transferring documentary credit to others, it can cash it before the due date.
  • Non-Transferable LC: Any document credit that cannot be transferred to another is non-transferable.
  1. Back-To-Back Letter of Credit: Back-to-Back Letter of Credit, is opened by the second party for a third party based on the first LC. For example, the buyer opens a letter of credit for the seller. The seller is either unable or unwilling to supply the goods, so he opens a letter of credit for a third party who can supply the goods and send them to the buyer. The seller opens this second letter of credit to the supplier, based on the existence and validity of the letter of credit provided by the buyer.

  1. Red Clause Letter of Credit: In this case, the LC beneficiary can receive sums of money as a prepayment from the credit opening bank or credit confirmer.
  1. Revolving LC: Document credit that is automatically reactivated after payment of the value of the goods (for subsequent shipments) is called renewable credit or revolving credit. In this case, nothing needs to be done to renew it.
  1. Stand By LC: This letter of credit is very similar to a bank guarantee (PBG). The method of payment for the cargo in the contract is other than LC and the Stand by LC acts as a guarantee, so that in case of non-fulfillment of the buyer’s obligations to the seller – in the field of payment for the goods – the seller can cash the documentary credit. Of course, this letter of credit has strict conditions, and all the terms of the contract, such as the time of sending the goods, must be applied regularly, and if there is a small difference, such as misspelling the beneficiary’s name, the bank will refuse to pay the credit.

It should be noted that if the seller asks the buyer to confirm any of the above-mentioned letters of credit in addition to the bank that opened the credit by another bank, this situation is called confirmed letters of credit. This happens when, due to the lack of political and security stability in the buyer’s country, the seller needs a third-party bank to approve the credit.

Apart from the mentioned methods for paying for goods, there are other methods such as Open Account and Clean Draft, but because they are less common today, their description is not given in this article.