8 Key Facts About Trade Payments

1.       In an open account transaction, the seller bears the risk. To mitigate this risk, the seller may require the buyer to provide a guarantee from a guarantor, usually a bank.

2.       In an advance payment transaction, the buyer bears the risk. The buyer may agree to this arrangement in situations where the commodity has a low value or trading with a trustworthy supplier.

3.       In documentary collections, D/P (Documents Against Payment) refers to a sight draft where the buyer must pay immediately to receive the documents.

4.       In documentary collections, D/A (Documents Against Acceptance) refers to a time draft where the buyer receives the documents and agrees to pay after a specified period, typically 30, 60, or 90 days.

5.       In a letter of credit (LC), the buyer opens the LC with the issuing bank. The issuing bank will then settle the payment with the advising bank, which works with the seller, upon receipt of the correct documents.

6.       In a transferable letter of credit, the seller acts as an intermediary supplier and can use the LC to secure payment for the direct supplier. The direct supplier cannot transfer this LC to anyone else except back to the seller.

7.       In a back-to-back letter of credit, the beneficiary can utilize the first letter of credit to open another one, where they themselves become the applicant, ensuring payment to the direct supplier. This method is frequently employed to obscure the identity of the direct supplier.

8.       In an escrow account, the buyer deposits money directly with an escrow company. Unlike a letter of credit, where the buyer may have some time to settle payment while waiting for the proper documents, funds in an escrow account are held until specific conditions are met. This can potentially impact the buyer's liquidity.

 Please these are general statements, and delving into the details may reveal other facts.