v Factors determine payment method
- Relationship between seller and buyer
- Nature of the merchandise
- Industrial norms: ex: oil industry – advance
- Political and economic stability in either or both countries
v Advance payment
Purpose
- The buyer trust the seller
- The buyer wish to build a long term trade relationship with the seller
- The seller has unique or high-demand products
- Big order, the seller need finance
- Safe for the seller if the seller worry about the risks in country of import
Risks to buyer
- Creditworthiness and reputation of the seller
- Trasportation risk
- If seller doesnot ship the goods, buyer’s last resort is to take action on basis of the sales contract
Risk to seller
- Perpare to ship goods but still no payment received
v Collection payment
Features
- The banks handle the documents as per instruction of the seller
- Bank donot undertake any payment but act only as collectors of payment
v Documentary credits
Features
- The issuing bank undertake payment
- The banks deal only with document rather than the goods
- Provide equal security to both buyer and seller
- The most common method in international trade
v Open account
Features
- Simple, low cost
- Buyer and seller highly trust each other
- Nomally used when goods are shipped to a foreign branch or subsidiary
Adv. To buyer
- Have time to receive goods, sell them in domestic market, receive payment before paying to the seller
- Safe for the buyer as he can examine the goods before payment
Risks to seller
- Credit risk from the buyer
- Increase cost of credit control
- If buyer doesnot pay, seller’s last resort is to take action on basis of sales contract
Risks to buyer
- No assurance of shipment
- Invoice may be different from actual shipment
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