INTERNATIONAL FORMS OF PAYMENT
Letter of credit
In the first export operations carried out by companies, the security of collection of the operation is generally sought. That is why the payment instrument called Letter of Credit is generally used.
This instrument ensures the exporter the receipt of the invoiced amount since this operation has the intervention and support of two banks, one is in the country of the exporter and the other in the country of the importer.
Because this payment instrument is more expensive than Collection or Transfer, importers prefer the latter before opening a Letter of Credit. In addition to the security in the collection, the exporter is obliged to issue the shipping documents according to what is indicated in the Letter of Credit, otherwise this would generate the so-called "discrepancies" which imply a higher cost of the operation.
Why is the Letter of Credit safer for the exporter?
Because even though the importer cannot pay the corresponding amount, the bank of the importer's country is committed to paying the exporter's bank at the expiration of the operation. The most used Letter of Credit is the so-called irrevocable, non-transferable and confirmed and is opened by the importer in favor of the exporter according to the conditions agreed between them. Once the exporter receives a Letter of Credit in his favor, he only has to prepare the shipment, prepare the documents and present them to the bank (this is called "Negotiating the documents").
The moment of collection of the Letter of Credit for the exporter, will depend on whether a payment was agreed "at sight" (cash against delivery of documents), or a specified term (generally it is agreed to 90 or 120 days from the date of shipment).
Export Collection (Documentary Collection)
Another of the instruments used for the collection of export operations is called Documentary Collection.
Its operation is simpler than that of Letter of Credit, since the exporter goes to a local bank with the shipping documents and manages the opening of a Collection. In this mode, the instrument used is a Bill of Exchange (similar to a promissory note).
The intervening banks do not have the obligation to support the payment since their responsibility is limited to sending the documents, receiving the amount of the operation (procedure in charge of the exporter's bank), delivering the documents and transferring the money paid by the importer ( procedure in charge of the importer bank).
The cost of the Collection is lower than that of the letter of credit and its operation is more agile.
If the importer does not pay the transaction, the exporter cannot claim the bank, since it is only an intermediary.
When the importer withdraws the documents, he will make the payment if the operation is "At sight" (cash), or he will accept the Bill of Exchange in case the operation is deferred. Documentary Collection is used when there is a commercial relationship of trust between the exporter and the importer.
Payment Order or Transfer
This form of payment is the most informal of those existing between the importer and the exporter.
It is used when there is a lot of trust between the two and sometimes it is done without bank intervention, depending on the operation of each country.
It has low cost and is agile. The importer makes the payment by money order or transfer in favor of the exporter, and upon receiving the amount, he ships the merchandise and sends him the shipping documents (in the case of operations with advance payment). The operation can be done with deferred payment, being that in this case, the exporter ships the merchandise and the importer makes the payment on the agreed due date. This procedure does not have any bank guarantee.