General

Foreign trade, also known as "foreign trade" or "import and export trade", refers to the exchange of goods, services, and technology between a country (region) and another country (region). So what are the payment methods for foreign trade? Let's take a look at the advantages of foreign trade payment methods.

Payment method for foreign trade:

1. Letter of Credit L/C

This is currently the most important and commonly used foreign trade payment method in international trade. A letter of credit is a conditional payment commitment made by a bank. It is a written guarantee issued by the issuing bank to the beneficiary at the request and instruction of the applicant. Within a certain period and specified amount, as long as the documents submitted by the beneficiary comply with the terms of the letter of credit, the issuing bank will definitely make payment.

Advantages: Bank credit, relatively safe;

Disadvantages: The requirements for documents are relatively strict, and the bank fees are higher, which occupies more of the buyer's funds.

2. Wire transfer T/T

It refers to a remittance method in which the remitter sends a telegram/telex or SWIFT with additional charges upon application to instruct a branch or agent bank in another country (i.e. the remitting bank) to pay a certain amount to the recipient. It is settled in foreign exchange cash, and the customer transfers the funds to the designated foreign exchange bank account of the company. The customer can request a certain period of remittance after the goods arrive.

① 100% pre TT, 100% payment to production, this method is rare. Please note that this is payment to production, not delivery. This payment method means that the full payment for the goods has not been received before production begins, which is of course a payment method with zero risk for the exporter. But the same approach poses the greatest risk for importers. Usually, this payment method is only used for sample orders or small orders. If your customer gives you 100% TT when placing an order, then you are lucky.

② After 100% TT, there is a certain level of risk involved. Unless we are regular customers, we are too passive and may run out of money and goods at any time. Whether to pay or not depends entirely on the customer's credit.

③ T/T deposit+sight letter of credit for final payment. Generally speaking, it is 30% T/T and 70% final payment letter of credit. Payment upon presentation of the bill of lading is the most common method, and of course, the higher the T/T ratio, the better. It is also a very safe payment method. The difference is that using this foreign trade payment method, the documents can only be delivered after receiving the bill of lading after the shipment is loaded onto the ship.

Advantages: Convenient, fast, and flexible;

Disadvantages: Commercial credit and security are inferior to letters of credit.

3. Collection and payment

Collection and payment include D/P, D/A, and O/A.

① D/A acceptance and payment of documents: verification and refund of taxes. The difference between logistics freight forwarder D/P and D/A is that D/P must pay for the bill of lading, pay the money first, and then submit the bill of lading. If the bank releases the bill of lading without authorization, the responsibility lies with the bank; The D/A importer can collect the bill of lading after XX days of acceptance of the payment on the bill of lading. If the payment is not made on time, the bank is not responsible.

② O/A credit transaction (o/a): The buyer and seller agree that the seller will first deliver the goods to the buyer, and the buyer will make payment within the agreed time. This belongs to the payment method of trade credit, which completely depends on the credit of both the buyer and the seller. It is mainly used for the payment of deposits, final payment of goods, commissions, fees, etc., and the collection risk involved is very high. It is the highest risk of foreign exchange collection among various settlement methods.

③ Documents against payment (D/P): refers to the condition that the buyer's presentation is subject to payment by the importer. That is, when the exporter hands over the bill of exchange along with the shipping documents to the bank for collection, the bank is instructed to hand over the shipping documents only when the importer has paid the full amount.

Advantages: The buyer is relatively convenient in terms of funds;

Disadvantages: Poor commercial credit and seller's collection security.

Letter of credit, telegraphic transfer T/T, and D/P are commonly used payment methods for foreign trade. Of course, in practice, we need to choose the corresponding payment method based on our own needs and actual situation.