Comparison of Payment Methods

4 key ways to make payments

The main difference between these payment methods is the level of risk faced by the importer and exporter:

Payment in Advance – before goods are shipped
Open Account Payment – after goods are shipped or received
Documentary Credits – payment is guaranteed by a bank subject to the fulfilment of certain terms and conditions by the importer and exporter
Documentary Collections – payment is handled by banks acting as agents for the importer and exporter

	Payment in Advance	Documentary Credit	Documentary Collection	Open Account Payment
Bank Charges	Low	High	Medium	Low
Payment Risk	Exporter has concerns over the ability and willingness of importer to pay	Payment is guaranteed by issuing bank if terms of credit are met	Payment risk unchanged but mitigated by control over goods	Exporter is comfortable with the reliability of the importer to pay
Country Risk	High Exporter requires payment before shipment	High Exporter requires confirmation from a bank in a low risk country	Medium Exporter mitigates risk by using the banking system to retain control over the goods by holding on to title documents	Low Does not mitigate country risk in any way
Credit Facilities	Not required	Required	Not required	Not required
Cash Flow	Importer has a good cash position Exporter needs cash as early as possible	Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay	Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay	Importer wants to delay cash outflow Exporter's cash flow must be able to support the delay
Price	Importer may be able to negotiate a discount	Price may be lower in exchange for added security of bank guarantee	Effect on price depends on collection terms	Importer may pay a premium for supplier credit