Method

Usual Time of Payment

Goods available to Buyer

Risk to Seller

Risk of Buyer

Comments

CASH IN ADVANCE

Before
Shipment.

After payment.

None.

Complete. Relies on seller to ship exactly
the goods expected,
as quoted and ordered.

Seller’s goods must be special in one
way or another, or special
circumstances prevail over normal trade
practices (e.g., goods manufactured to
buyer-only specification).

LETTER OF
CREDIT (L/C)
(See next two items)

Commercial Invoice
must match the L/C
Dates must be carefully headed.
“Stale” documents are unacceptable for collection.

Letters of Credit require total accuracy
in conforming to terms, conditions, and
documentation. Consult your United
Shipping Partner to determine feasibility of Terms and conditions.

CONFIRMED
IRREVOCABLE
CREDIT

After shipment
is made, documents presented to the bank.

After payment.

Gives the seller a
double assurance of payment. Depends on the terms of the L/C.

Assures shipment is
made, but relies on
exporter to ship goods as described
in documents. Terms may be negotiated
prior to L/C agreement,
alleviating buyer’s decree of risk

The inclusion of a second assurance of
payment (usually a U.S. Bank) prevents
surprises, and adds assurance that issuing bank has been deemed acceptable by confirming bank. Adds
cost and an additional requirement to seller.

UNCONFIRMED
IRREVOCABLE
CREDIT

Same as above.

Same as above.

Seller has single bank assurance of payment and seller remains dependent on foreign bank. Seller should contact his banker to determine whether the issuing bank has sufficient assets to cover the amount.

Same as above.

Credit can be changed only by mutual agreement, as stipulated in a sales agreement. Becomes open account with buyer’s bank as collection agent. Foreign bank may have problems making payment in sum or timeliness.

DRAFTS (See next two items)

Remittance time from buyer’s bank
to seller’s bank may still take one week to
one month.

Drafts, by design, should contain terms
and conditions mutually agreed upon.

A draft may be written with virtually any term or condition agreeable to both parties. When determining draft tenor (terms and conditions), consult with (terms and conditions), consult with determine the most desirable means of doing business in a given country

SIGHT DRAFT
(with documents against acceptance)

On presentation of draft to buyer

After payment to buyers bank.

If draft not honored goods must be returned or resold. Storage, handling and return freight expenses may be incurred.

Assures shipment but not content, unless inspection or check-in is allowed before payment

A draft can be a collection instrument used to exchange possession and title to goods for payment. Seller is essentially drawing a check against the bank account of the buyer. Buyer’s Bank must have pre-approval or seek approval of the buyer prior to honoring the check. Payable upon presentation of documents