Explain in various modes of payment in international trade.Discuss the role of letter of credit in the same.

Explain in various modes of payment in international trade. Discuss the role of letter of credit in the same.

Answer:
Various modes of payment in international trade are as follows:
· Cash-in-advance:

• By this method, exporter receives the payment before the transfer of goods.
• Options in this mode could be through wire transfers and credit cards.
• This is the least attractive method for
• many of the buyers as it creates cash flow problems.
• The buyers are concerned about the quality/quantity and delivery of the goods that are not sent if the payment is made in advance.

· Letters of credit

• The letter of credit is the most secure instrument available for international traders.
• This is the commitment made by the bank that the payment will be made to the exporter if the terms and conditions are met. The terms and conditions of the payment are explained in the required documents.

· Documentary collections

• Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the documents to the importer's bank (collecting bank).
• The document contains information about the payment. The funds are collected from the importer and paid to the exporter through the banks involved in the collection, in exchange for the documents.

· Open account

• The open account transaction involves the shipping and delivery of goods in advance. The payment is due usually from 30 to 90 days.
• This is advantageous for the importer in cash flow and cost terms, but at the same time it is very risky for the exporters. Buyers from abroad stress on open accounts since the extension of credit from the seller to the buyer are more common in many countries.

Letter of Credit:

International Trade is affected by distance, laws, political instability and lack of familiarity by the transacting parties. It is a document that is issued by the bank that guarantees payment to a beneficiary. It is written by the financial institution in favour of the importer of goods to the seller. In the letter, the bank promises that it will honour the drafts drawn on it if the seller confirms to the specific conditions that are set forth in the letter of credit. Letter of credit assumes significance since it can be used to mitigate risk.
The process of letter of credit working is as follows:
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