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Movements happening in International Trade

In international trade, there are three kinds of movements happening.

1. The goods move from the exporter to the importer
2. The documents related to the goods, also move from the exporter to the importer. These documents are very important because without these documents, the importer won't be able to release the goods in his/her country.
   
3. The payment related to the goods move from the importer to the exporter
   

Depending on the timing and the way these three movements happen, there are four main methods of settlement in international trade -

1. Open Account/ Cash on Delivery
2. Documentary Collections
3. Documentary Credit
4. Advance Payment
   

Open Account / Cash on Delivery

The open account method is also called cash on delivery.

Here the exporter first sends the goods and the importer pays at a later date. Also, the documents related to the trade is sent directly to the buyer. The payment for the goods is also done directly between the importer and the exporter, without using banks as agents for collection.

So, you can understand that in this method the exporter must have a lot of trust on the importer because he is parting with the goods before getting any payment.

This can be a method of payment when the exporter and the importer know each other for a long time and there are regular shipments and the importer makes periodic payments.

Advance Payment Method

The opposite of the open account method is the advance payment method.

Here the importer pays first, and the exporter sends the goods at a later date. Here also, the documents related to the goods are sent directly to the importer.

Here, it is the importer who must put trust on the exporter.

There can also be a combination of the two methods we just discussed, where a certain % can be paid upfront and the rest is paid after the goods are received.

Now, let's learn how documentary collections and documentary credit are different from these two methods.

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Next:    Documentary Collections in International Trade