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.
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.
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
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.