Remittance is the simplest payment method. Here, the buyer (importer) through the bank sends money to the seller (exporter). This type is rarely used in international payments as the payment depends on the goodwill of the buyer, hence this payment method does not guarantee the interests of the seller. Occasionally, this method is used in paying in advance, paying commissions, etc.
Remittance includes paying by telegraphic (Telegraphic Transfer – T/T) and paying by mail (Mail Transfer – M/T), both must go through the bank as an intermediary to pay. Therefore, the remitter has to pay the procedure fee to the bank and an additional telegraphic fee if you pay by T/T.
To prevent risks, the parties should:
- Build a clear money transfer route (how much % in advance at which time and which time for the rest’s payment).
- Agree on the time of money transfer to coincide with the time of delivery.
- Clear regulations on means of money transfer determine who will bear the cost of money transfer.
This method of payment is made by the exporter’s opening an account, on which the amount owed by the importer for the purchase of goods or other expenses related to the purchase of goods. The importer periodically (monthly, quarterly, or semi-annually) pays the debt formed on the exporter’s account.
This method is completely beneficial for the importer (who is recorded). The exporter may bear the risk of non-payment or delay in payment or incomplete payment by the importing party. And to ensure the safety of the exporter, the parties can apply security measures such as bank guarantee letter, standby letter of credit, deposit, etc.
An open account payment method is essentially a form of business credit. Open account is widely used in domestic payments, but it is rarely used in international payments because it does not provide adequate assurance for exporters to collect payment on time. This payment method requires a very high trust of the exporter for the importer, mainly applied in payment which:
- Between branches in different countries of the same company
- Between companies which have long-standing and frequent trading relationship, especially in the purchase of not very large quantities of goods
- Commissions and consignment payment
Collection of Payment
Collection of payment is a payment method by which the seller, after performing the obligation to deliver goods or providing a service to the customer, draws a bill of exchange for the buyer’s money, and then proceeds to the collecting bank for the amount stated above.
Common means of international payment includes bill of exchange, promissory note, international check and financial invoice. Collection of payment is divided into 2 types: clean collection or documentary collection.
The clean collection is a payment method by when the seller asks the bank to collect the money of the bill of exchange from the buyer without any conditions. Along with sending the goods to the buyer, the seller also sends the documents directly for the buyer to pick up the goods.
This can be a disadvantage for the seller as the bank is only an intermediary and may be rejected by the buyer. Here, the buyer doesn’t have to pay for the goods first but has already kept the documents to receive the goods from the carrier. Thus, the intentional appropriation of capital, late payment, lack of payment, refusal to pay, etc. is completely possible.
This payment method should be applied only when both parties are reliable partners of each other, and in international goods sale contracts, there should be strict sanctions to ensure the seller benefit. For example, liability to pay damages due to non-payment, late payment or incomplete payment, interest on late payment, the penalty for breach of a payment obligation, etc.
Documentary collection is a case in which the seller transfers to the bank a bill of exchange together with bills of lading for collection by the buyer, on the condition that the buyer pays or accepts to pay the bill of exchange (which has a maturity date in case of credit sale).
This method allows the exporter to keep control of the goods until payment is finished or guaranteed. Generally, the exporter delivers the goods, prepares documents such as commercial invoices and bill of lading, and then sends the documents with bill of exchange to the collecting bank. The bank will only deliver the documents to the importer if the importer pays the bill of exchange or accepts payment in the future.
In the business process of this payment method, there is one point to note: the exporter does not deliver the documents directly to the importer. The importer must finish payment first and then get the documents from the bank to receive the goods. Thus, this method protects the interests of the exporter, avoiding the situation of capital appropriation, late payment, incomplete payment or refusal of payment by the importer.