Under this method a bank draft or a bank advice is received by the exporter either on confirmation of the order or at any time before shipment. This obviously is the most advantageous form of payment from the standpoint of the exporter as he does not have any risks. But this method is also the most uncommon. Hardly any foreign buyer would be willing to pay in advance of shipment unless (1) there is heavy demand for the goods, and (2) the goods are tailor-made for the customer. Even in such cases compromise are very often made. A notice is required to be sent when goods are ready. Sometimes a percentage is paid in advance, a percentage on manufacture and the rest on delivery. In many cases exchange control restriction in the importing country may make a payment in advance virtually impossible. The exporter may also insist upon advance payment if (1) political conditions in the importing country are unstable and (2) the credit standing of the buyer is poor. There are, however, certain specific situations where this type of payment is common. There are some large buying situations where this type of payment is common. There are some large buying organizations in the USA and the Continent which have buying agents all over the world. These agents sometimes pay in advance for the goods procured in the country which are subsequently sent to the foreign principals. In such cases the burden of export finance is carried by the importer.
Under this form of payment the exporter sends the documents directly to the overseas buyer with a covering letter asking for the invoice value to be remitted to him. The exporter does not draw any bill of exchange. Thus, there is no evidence of the obligation to pay. If no credit is involved, the importer must make the remittance immediately. In more common cases, the importer is allowed a credit period. In that case, the importer will make the payment on the expiry of the credit period. This method is simple and avoids additional charges involved in other payment arrangements. Under this method of payment the burden of finance is carried by the exporter. It also involves real risk of the exporter. But the exporter may have to accept such a method if there is keen competition among sellers. However, this method presupposes that there is a long and established relationship between the parties and exporter is absolutely sanguine of the bonafides of the overseas party. Again the exporter should have the necessary financial strength to finance the operation. One of the basic conditions which must be satisfied for this firm of payment is that there no foreign exchange regulations in the importer’s country. Otherwise the importer may not be able to remit the purchase price on the due date owing to such exchange restrictions. Similarly the foreign exchange regulations of the exporting country should permit such an arrangement. In India, the Reserve Bank of India has permitted this facility for intra-company transaction against what are known as ’Round Sum Remittances’.
The above mentioned two forms of payment are not very common. The documentary bills however, finance a large proportion of overseas trade. These bills act as a bridge between (1) exporter’s unwillingness to part with the goods until he is paid for and (2) importer’s unwillingness to part with his money unless he is sure of receiving the foods. Banks provide a via media by giving the necessary assurances to both the parties. Under this form of payment the exporter agrees to submit the documents to his bank along with the bill of exchange. The documents required usually are a full set of bill of lading invoice and a marine insurance policy.
There are two types of payments under this procedure: Documents against Payment (D/P) and Documents against Acceptance (D/A). Under D/P bills, the exporter’s bank will send the documents to its correspondent bank in the buyer’s country which will present the documents to the buyer and on payments of the bill exchange will deliver the documents to him so that he can take possession of the goods. In the ease of D/A bills, the correspondent bank will submit the bill of exchange to be signed by the buyer to indicate his acceptance of the payment obligation. After the buyer accounts the bill he will get possession of the documents. On the due date of payment, the bank will again present the bill to the buyer who makes the payment. The money received is remitted through the usual banking channels to be credited to the exporter’s account. D/P bills usually are drawn on sight i.e. no credit is involved. D/A bills involve credit for a fixed period and are therefore drawn on ‘usance’ basis.