Payment Terms in International Trade: Open Account, Barter Trade and Bank Guarentee

Open Account

From the seller’s point of view the Open Account is the most unsatisfactory international business payment system. Under this payment system the arrangement is that the buyer pays at the end of an agreed period. The seller consigns the goods directly to the buyer or to his order and documents pertaining to the goods are sent directly to the buyer enabling him to take delivery of the goods. Under this payment system the seller after having supplied goods is purely at the mercy of the buyer. Such a payment is normally in those trading arrangements requiring a high degree or trust between the buyer and the seller and a regular continuous business relationship between the two parties. Advantage of this payment system, is that since there is no involvement of a bank, there is less paper work and consequently lesser costs. This system is more beneficial to a large number of exporters and importers and is purely based upon full and undoubted trust between the two parties. Certainly from the exporter’s point of view if you are going to release goods and also give your buyer the documents to go with it, you must have a very high element of trust. Otherwise you would be out of business. Open Account was a favored means of settlement in business with Europe. The letter of credit as means of payment for international trade between countries in Europe is almost extinct. People have moved for Bills for Collection or Open Account for settlement of their international trade transactions.

Barter Trade

This is another system that is used occasionally- the barter or-counter trade. Buyer offers commodity in sale for a commodity rather than cash because of the foreign exchange problems. There are, therefore, regulations to pay for a commodity to the seller in the form of another commodity. For this purpose they would structure their letter of credit transaction, it would say rather than in real reimbursement under letters of credit that you would receive cash, the reimbursement is that there are goods going the other way. What would happen is the Government looks for business support for exporters who would be administering those transactions and effectively making a settlement for these commodities. It does happen in various countries specially where there is a foreign exchange implication limiting the ability to move funds from out of the country.

Bank Guarantee

It is a promise by the Bank to make payment to seller (Beneficiary) in case of default by the buyer. When the buyer and the seller do not have confidence in each other, they take help of some intermediary who will protect the interest of both the parties. It is observed that banks generally play the role of intermediary. Bank Guarantee is one such method of payment in which the buyer’s bank guarantees to pay the seller in case the buyer fails to pay for the goods supplied by the seller.