The Treasurer’s Guide to Trade Finance

Chapter 3 Understanding trade

Payment term Importer Exporter Role of bank

Documentary

collection

delivery against

acceptance

Delivery against

acceptance allows

the importer to

defer payment.

Again, the importer

may be able to

arrange inspection

of goods before

accepting the

obligation to pay.

Exporter can usually

raise finance against

the acceptance, which

is also evidence of the

importer’s debt.

As for delivery against

payment, except the

importer’s bank will release

documents to the importer

when the importer accepts

the bill of exchange. The

importer’s bank will then

hold the bill of exchange

until maturity and present it

to the importer for payment.

Again, neither bank offers a

guarantee of payment.

Documentary

collection

delivery against

acceptance

pour aval

The importer’s

credit status

will determine

whether the bank

is prepared to

avalise the bill, as

the avalisation is a

contingent liability.

As delivery against

acceptance, but

the exporter has a

guarantee of payment.

However, it will

be exposed to the

(importer’s) bank, which

has avalised the bill.

As delivery against

acceptance, with the

importer’s bank (or another

bank) guaranteeing

accepted bill before

documents are released to

the importer.

Documentary

credit

The importer will

be required to pay,

as long as the

exporter meets

the terms of the

letter of credit. The

importer will need

to arrange a credit

facility to support

issuance of letters

of credit.

The exporter has an

effective guarantee of

payment from a bank,

as long as it can meet

the terms of the letter

of credit. The exporter

is exposed to the

creditworthiness of the

bank issuing the letter

of credit.

An issuing bank issues a

letter of credit on behalf

of an importer. The bank

will pay the exporter if the

terms of the letter of credit

are met. The importer will

need to arrange a credit

facility with the issuing bank

before a letter of credit can

be issued.

Payment in

advance

The riskiest term

of payment for

the importer, as

it could pay but

receive nothing

in return. The

importer may be

able to negotiate

a better price,

however.

Payment is received

before goods are

shipped so there is no

risk to the exporter.

The importer is funding

the exporter’s working

capital.

None.

We shall examine the nature of each term

of payment from the perspective of both the

importer and the exporter. These terms of

payment are also applicable for domestic

transactions. There is a more detailed

examination of the documentation required

in Chapter 7.

Open account trading

Open account trading is the least secure

method of payment, from the perspective

of the exporter. Despite this, the proportion

of international trade done on open account

trading has been growing in recent years, and

now represents approximately 75% of volumes.