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Table of Contents
1.CASH IN ADVANCE (CA)
2.OPEN ACCOUNT
3.BANK’S DOCUMENTARY COLLECTION
4.CASH AGAINST DOCUMENTS (“CAD” or “DP”)
5.LETTER OF CREDIT
CASH IN ADVANCE (CA)
Cash in advance is one of the most secure payment terms for sellers, and the least
secure for buyers. Indeed, Seller ships the goods to the buyer only after receiving the
full (or partial) payment for the goods (upfront payment).
Paymentsaremade by wire transfer or by company checks (in the US).In the project
materials industry, cash in advance payment terms are rather rare and may occur for
stock and fast-track deliveries only.
What is “TT Payment”?
A bank transfer, otherwise called telegraphic transfer or telex transfer (“T/T”) is the
electronic transfer of funds from a buyer/importer to a seller/exporter, via a bank or a
similar institution.
For most countries and banks, as a buyer confirms a wire transfer, the funds cannot be
recovered from the beneficiary (such payments are irrevocable). ACH payments may be
an exception, i.e., they can be revoked.
T/T payments expose the buyer to high risks.
Alternative payment risks, described below, have been introduced to minimize the
payment risks for buyers (and suppliers) in international trading operations.
OPEN ACCOUNT
Under open account payment terms, the supplier ships the goods to the buyer without
receiving upfront payments and collects the due amounts later (15, 30, 60, 90 days or
more).
Discounts on the invoice face value may be granted, on the sale invoice, for anticipated
payments.
This type of payment, which is quite common, has an opposite nature to “cash in
advance”, as it is very favorable for the buyer and unfavorable for the seller (who bears
the full payment risks).
Payments in open account are generally accepted by suppliers with low negotiation
power or by suppliers that have long-lasting relationships with the buyer.
Credit Insurance
Some sellers subscribe credit insurance contracts believing that they will protect their
“open account” sales.
A common trait of these types of contracts, which are generally expensive, is that they
cover the creditor in case of bankruptcy of the debtor, but they do not cover the seller
when the buyer rejects payment for any due or undue cause.
When a buyer disputes a delivery, the insured seller must turn to the Law, and not to the
credit insurance company, to get the payment.
BANK’S DOCUMENTARY COLLECTION
Under this payment terms, the seller gets paid, and the buyer and the seller exchange
the documents representative of the goods and the payment via the intermediation of a
remitting and a collecting bank).
This type of payment works in this way:
1.The seller ships the goods to the buyer
2.The submits the shipping documents and a “collection order” to its bank
(“Remitting bank”) at the time of shipping. The draft includes instructions to
release the documents to the buyer upon receipt of a buyer’s payment or buyer’s
acceptance of the draft (which can be at sight, demanding payment on
presentation, or deferred at a future date)
3.The Remitting bank sends the documents, the draft, and the collection
instructions to the “Collecting or presenting bank” (the bank of the importer)
4.The collecting bank carries out the seller’s collection order and, upon receipt of
payment from the buyer, remits payment to the seller’s bank and to the seller,
ultimately
CASH AGAINST DOCUMENTS (“CAD” or “DP”)
Cash Against Documents (“CAD” or “D/P”) are widely used payment terms in
international trading operations.
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