Payment Collection of Bills in International Trade
- Clean Payment
- Collection of Bills
- Letters of Credit L/c
In clean payment method, all shipping documents,
including title documents are handled directly between the trading partners.
The role of banks is limited to clearing amounts as required. Clean
payment method offers a relatively cheap and uncomplicated method of payment for
There are basically two type of clean payments:
In advance payment method the exporter is trusted to ship the
goods after receiving payment from the importer.
In open account method the importer is trusted to pay the
exporter after receipt of goods.
The main drawback of open account method is that exporter assumes all the risks while
the importer get the advantage over the delay use of company's cash resources and
not responsible for the risk associated with goods.
The Payment Collection of Bills also called “Uniform Rules for
Collections” is published by International Chamber of Commerce (ICC) under the
document number 522 (URC522) and is followed by more than 90% of the world's
In this method of payment in international trade the
exporter entrusts the handling of commercial and often financial documents to
banks and gives the banks necessary instructions concerning the release of
these documents to the Importer. It is considered to be one of the cost
effective methods of evidencing a transaction for buyers, where documents are
manipulated via the banking system.
There are two methods of collections of bill :
In this case documents are released to the importer only when the payment has
In this case documents are released to the importer only against acceptance of
Letter of Credit also known as Documentary Credit is a written undertaking by the
importers bank known as the issuing bank on behalf of its customer, the
importer (applicant), promising to effect payment in favor of the exporter
(beneficiary) up to a stated sum of money, within a prescribed time
limit and against stipulated documents. It is published by the International
Chamber of Commerce under the provision of Uniform Custom and Practices (UCP) brochure
Various types of L/Cs are :
A Revocable Letter of Credit can be cancelled without the consent
of the exporter.
An Irrevocable Letter of Credit cannot be cancelled or amended without the
consent of all parties including the exporter.
If payment is to be made at the time of presenting the document then it is referred as the
Sight Letter of Credit. In this case banks
are allowed to take the necessary time required to check the documents.
If payment is to be
made after the lapse of a particular time period as stated in the draft
then it is referred as the Term Letter of Credit.
Under a Confirmed Letter of Credit, a bank, called the Confirming Bank,
adds its commitment to that of the issuing bank. By adding its commitment, the
Confirming Bank takes the responsibility of claim under the letter of credit,
assuming all terms and conditions of the letter of credit are met.
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