TERMS OF PAYMENT&

METHODS OF PAYMENTSBy

Shaukat Orakzai

TERMS OF PAYMENT

When negotiating with the buyer, the seller needs to determine the detailed terms of payment to be included in the sales contract. This can be a complicated process in which, initially, both parties could have different views.

In order to enter negotiations it is essential to know what details the terms of payment must contain and what minimum requirements the seller must adhere to in order to maintain the expected level of security.

REQUIREMENTS

When payment should take place (time of payment)

Where payment should take place (place of payment)

“And” How payment should take place (method of

payment).

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Time of payment The negotiations will determine when the payment will

take place. To avoid future disputes it is important that all events

in the terms of payment are related to certain clearly defined points on the time axis of a contract.

The size of the transaction, the delivered goods and the length of the credit discussed and the security for it will finally decide what credit terms can be offered and may bridge the gap between the different views of time of payment.

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Place of payment The question of where payment should take place

must be defined, since it determines the fulfillment of the obligations of the buyer. This also relates to what form of payment is used.

The buyer’s interest that the place of payment is stated in the terms of contract, particularly with larger amounts, when every day when interest can be earned may be of importance.

The place of payment should therefore be defined as being at the premises of the seller’s chosen bank and account number, and the corresponding SWIFT BIC should always be included in the terms of payment to secure accurate and rapid transfer.

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Methods of paymentHow payment is made depends on the role of the banks involved and affects the security offered to both buyer and sellerPopular methods of payment used in international trade include: Cash with Order (CWO)-the buyers pay cash when he

places an order. Cash on Delivery (COD)-the buyer pays cash when the

goods are delivered. Documentary Credit (L/C)-a Letter of credit (L/C) is

used; gives the seller two guarantees that the payment will be made by the buyer: one guarantee from the buyer's bank and another from the seller's bank.

CONTINUE… Bills for Collection (B/E or D/C) -here a Bill of

Exchange (B/E)is used; or documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment.

Open Account- An open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. This method can be used by business partners who trust each other; the two partners need to have their accounts with the banks that are correspondent banks.

Thank You