Trade Finance/Payment Methods

Module 4: Payment Methods

Module Introduction

The objective of this module is to establish the most appropriate methods and terms of payment and required documentation to ensure timely payment for the sale of goods and/or services and to facilitate external financing.

This resource on international finance is focused on the global business professional who is a generalist who may be involved in the sale and/or purchase of goods and/or services internationally. It is essential that a global business professional understand and be able to use the methods of payment available for international business transactions, the documentation required to obtain or initiate payment, and the risks involved. This module consists of nine units and is the largest module in this International Finance resource. It might seem overwhelming to those who are new to international finance/business; however, by working through each of the units in this module, you will see the scope more clearly.

Accountants have a saying, “A sale isn’t a sale until the money is in the bank.” To ensure that international sales are finalized or that the money is in the bank, as an accountant might say, a global business professional must take into consideration and understand the nine unit objectives in this module. You must have:

knowledge of methods of payment (letters of credit, documentary collections, cash in advance).
knowledge of commercial, economic, and political risks of buyer and buyer’s country.
knowledge of international regulations published by the International Chamber of Commerce (Paris) governing international transactions and methods of payment (Incoterms, UCP, arbitration).
knowledge of methods of funds remittance (checks, banker’s draft, SWIFT transfer).
knowledge of types of letters of credit (confirmed/ unconfirmed, transferable, standby).
knowledge of types of payment ( sight, deferred , commercial invoices, transport documents and documents relating to services).
knowledge of documentation and requirements (e.g., commercial invoices, transport documents and documents relating to services)
knowledge of related financial and legal costs ( bank charges, insurance premiums, legal fees).
knowledge of communication of letters of credit, collections, and associated documents electronically via the Internet (eUCP, SWIFT).

These nine unit objectives paint a complete picture of the payment requirements, risks, methods, costs and regulations associated with obtaining or sending payment for an international transaction. The key to successfully working with this process is to have a clear understanding of the terminology associated with methods of payment (especially letters of credit). Without this, you may become confused.

Understanding how each of the unit objectives relates to and affects the others is also important. Thus you must learn the following:

that the methods of payment create associated risks for a buyer and seller.
that receipt of payment is often dependant on the commercial, economic and political risks evident in a country and should dictate the method of payment chosen for the transaction.
that because companies operate in sovereign states that have different laws, the ICC has established guidelines to help businesses cross borders and interact on a global basis.
that the way money is remitted must be stated along with the method of payment.
that there are safeguards available to reduce risks for the buyers and sellers through letters of credit as well as other means.
that knowing the date when the money will be remitted is critical.
that ultimately the funds will not be remitted if the appropriate documentation is not presented by the right party who is responsible for creation of the documents.
that, unless you are receiving payment in cash that has been stuffed into a suitcase, funds and documents will be transmitted using service providers such as banks, who must be paid for their services; and, depending on their level of involvement, these fees, whether minor or significant, will ultimately affect the profitability of a transaction if not taken into consideration.
that global business is now taking advantage of technology and utilizing the internet not only for research but also for document transmission with guidelines for methods of payment which have been updated to include this process.

Module Sections

About this Resource

These resources were developed by MSU Global with funding provided by a U.S. Department of Education, Business in International Education Title VIB grant.