The Treasurer’s Guide to Trade Finance

A Reference Guide to Trade Finance Techniques

for the Examination of Documents under
Documentary Credits (ISBP).
Recognising the increased use of
electronic channels for the exchange of
documents, the ICC has also developed
eUCP. These have not yet been formally
incorporated into the latest version of
the UCP, reflecting the continued use of
established techniques.
To avoid confusion, the version of UCP
standards used should be stated on the letter
of credit.

Payment in advance

Payment in advance is the least secure for
the buyer and, correspondingly, the most
secure for the seller.

Core characteristics

Few companies can insist on other
companies paying in advance, as they will
always be vulnerable to competitors offering
even marginally better payment terms.
It is, however, relatively common for
companies to ask for partial payments in
advance, either as a deposit or as a more
formal mechanism to fund the purchase of
initial raw materials or other costs associated
with the transaction.

Advance payment terms can be

incorporated into a letter of credit, which

allow the seller’s bank to advance a

proportion of the value of the L/C on

presentation of certain documents.

It is also relatively common for service-

based agreements, especially longer-term

ones, to include pre and part-payment at

various stages of the relationship. Telephone

contracts, for example, usually involve an

initial set-up fee and a minimum contract

term in order to attract lower call costs in the

longer term.

Assessment

This technique is most appropriate when

selling to consumers over the internet, where

convenient payment methods (primarily

payment cards and electronic funds transfers)

can be integrated into the sales engine.

Payment in advance is also appropriate

where the trading relationship is new and the

counterparty’s credit status cannot be reliably

assessed, or the buyer is located in a country

which itself represents a significant risk.

Finally, some companies may be able to

insist on payment in advance, especially where

they have few direct competitors or there is a

relatively high demand for the product.