If you are familiar with international sale contracts you will know that they are mostly regulated by the International Commercial Terms, or Incoterms. These widely used, standardized trade terms deal with who is responsible for and who has to pay for what; but they do not say how.
Getting paid in an international sale is a sensitive topic, especially if the parties do not know each other. The issue, of course, is that the parties deal with a sale transaction that, by definition, is outside the scope of their respective domestic legal systems; if anything goes wrong, it might very difficult to recoup what has been lost.
The 4 most common payment methods
Even if payment methods in an international sale contract have not been standardised in the same way as responsibility and insurance have been, there are four main payment methods that have emerged from common practice:
- Open account
- Bill of exchange
- Documentary bill
- Letter of credit (also called documentary credit)
While the latter is the most reliable and widely used, the other payment methods might be preferred in certain situations due to their better ease of use.
In this article, we will discuss the first one, the open account.
Getting paid in cash: the open account
The open account is a payment by cash on order. While extremely simple to arrange, the problem with the open account is that it exposes one of the parties to a great amount of risk, depending on when the order to pay occurs.
Cash in advance
As the name suggests, cash in advance means that the buyer is ordered to pay before delivery takes place, i.e. before he receives the goods. While great for the seller, cash in advance exposes the buyer to maximum risk in case the goods do not arrive for any reason, and it is not used unless there is a high level of trust between the parties.
The sight payment is a payment on sight of documents. The buyer prepares the money on an ad-hoc account and transfers it to the seller upon presentation of documents, typically transport documents such as a bill of lading.
Because the buyer has not yet parted with the cash when he receives the goods, the sight payment is extremely risky for the seller, who must have confidence that the buyer can and will pay.
For this reason, this arrangement is commonly used only in transactions between a parent and its subsidiaries.
Cash on delivery
Cash on delivery (COD) is a payment method whereby cash is collected by the carrier on behalf of the seller (or by the seller himself if he is using his own transportation) upon delivery of the goods.
This method is used in rail and road transport, and can be especially easy to use in an EXW Ex Works Incoterms contract, whereby the the buyer will collect the goods directly at the seller’s premises.
Are you in the import export trade? Visit our platform and join our network of import and export trading companies.