Trade Articles

Types of Payment and Its Definition

1. L/C

Letter of Credit or (L/C) is a legal document to arrange payment between a buyer (importer) and seller (exporter). The bank, as intermediary, ensures security for both parties, giving the exporter confidence that the importer is capable of paying for the goods while assuring the importer that payment will be made to the exporter only after the terms outlined in the letter of credit have been met.

2. T/T

T/T or other names are Teletransfer, Wire Transfer, Bank Transfer and Postal Money Order, are the easiest payment form and are typically used when samples or small quantity shipments are transported by air. It should be used between buyers and seller who have already established a mutual trust, as those are the fastest and cheapest way of cash transfer. It usually takes 3-4 days for such a wire transfer anywhere in the world and up 5-10 days for a postal money order. If you will be using this method try and propose a 50/50 or 30/70 deal. That is 50% of money in advance and 50% after you receive the goods.

3. Open Account

A seller ships the goods and all the necessary shipping and commercial documents directly to a buyer. This buyer agrees to pay the seller's invoice at a future date (net 15 days, net 30 days or with a discount offered - for example, 1% if paid within 20 days of invoice date).

4. Documentary Collections

A documentary collection is a payment mechanism in which a seller uses a bank as his/her "agent" in collecting payment from a buyer located overseas. After shipping the goods, the seller submits a draft (a demand for payment) and the relevant shipping documents to the bank. The draft will include instructions to release the documents to the buyer upon the buyer's payment or acceptance of the draft. The seller's bank sends the documents, draft, and collection instructions to a branch or correspondent bank in the buyer's country. This bank carries out the seller's collection instructions and, upon receipt of payment from the buyer, remits payment to the seller's bank for the credit of the seller.

5. DA

DA is also known as Documents against Acceptance. A buyer is required to "accept" a seller's time draft, thus acknowledging obligation to pay at the specific future date. The time of payment occurs at maturity of an accepted time draft, 30, 60 or 90 days after date of acceptance or date of bill of lading.

6. DP

DP or Documents against Payment is the type where payment is made on presentation of the sight draft by a bank to the buyer, usually one or two weeks after shipment. Under D/P terms, the seller, through a bank acting as an agent, is able to retain control of the goods until the buyer pays. A buyer is required to pay a seller's sight draft in order to obtain shipping documents.

7. Cash in Advance

The seller requires receipt of payment from the buyer before shipping goods. Payment may be made by wire-fund transfer from the buyer's bank to the seller's bank, or by company check, credit card, or other agreed upon means.

8. The Western Union

The Western Union Company is a financial services and communications company based in the United States. This company was the best known US company in the business of exchanging telegrams. Western Union has a number of divisions, with products such as person-to-person money transfer, money orders, and commercial services.

9. MoneyGram

Moneygram is a person-to-person money transfer virtually to anyplace around the world. The Moneygram is an extensive and proficient network, linked by computers, which will transfer your money around the world with care.