Financial Aspects
Payment methods in international trade are of major importance, especially given the geographic distances involved. Over the years, standard methods of payment used by those engaging in foreign trade have been formulated. The International Chamber of Commerce (ICC) in Paris has published standard rules specifying the procedures and definitions for handling the numerous components of these payment methods. The rules are binding upon all the countries subscribing to them, including Israel.
Following are the four main methods of payment:
Open Account - This method is based on relations of trust and it saves the cost of going through various middlemen, such as banks. The exporter sends the goods and the accompanying documents directly to the importer and to his order. The consideration is transferred by the importer to the seller by private check or bank transfer, as concluded between the parties in advance. This method is clearly in the importer's favor and gives him many advantages.
Cash Against Documents (C.A.D.) - The contact between the importer and the exporter is through a bank or a number of banks. It is the bank's role to serve as the exporter's trustee, the deliverer of the documents, in consideration of a payment or the importer's payment commitment. According to this method, the exporter makes the release of the goods to the importer contingent upon receipt of payment or payment commitment, but without a guarantee of the importer's bank.
Letter of Credit (L/C) – This method is used in cases where the exporter wishes to avoid the risk, and it involves a guarantee of the bank opening the L/C. This is usually an irrevocable undertaking issued by the importer's banker in favor of the exporter. In a letter of credit, the importer’s bank undertakes to pay for the documents sent by the exporter from the importer’s account. The L/C attests to the shipment of the ordered goods under precise conditions, as set forth in the letter of credit, against delivery of the documents.
Prepaid – According to this method, the importer pays for the goods prior to receipt thereof. The importer does not receive credit and bears the entire risk for receipt of the goods and the quality thereof.
Cash Against Documents (C.A.D.) - The contact between the importer and the exporter is through a bank or a number of banks. It is the bank's role to serve as the exporter's trustee, the deliverer of the documents, in consideration of a payment or the importer's payment commitment. According to this method, the exporter makes the release of the goods to the importer contingent upon receipt of payment or payment commitment, but without a guarantee of the importer's bank.
Letter of Credit (L/C) – This method is used in cases where the exporter wishes to avoid the risk, and it involves a guarantee of the bank opening the L/C. This is usually an irrevocable undertaking issued by the importer's banker in favor of the exporter. In a letter of credit, the importer’s bank undertakes to pay for the documents sent by the exporter from the importer’s account. The L/C attests to the shipment of the ordered goods under precise conditions, as set forth in the letter of credit, against delivery of the documents.
Prepaid – According to this method, the importer pays for the goods prior to receipt thereof. The importer does not receive credit and bears the entire risk for receipt of the goods and the quality thereof.
