BAFIN Methods of payment

• Method of payment


  Determines how payment is going to be made, ie the obligations that rest with both buyer and seller in relation to monetary settlement
• The method of payment also determines - directly or indirectly - the role the banks will have in that settlement
• The security aspect is usually not that simple to define in advance
• There are many different variations and alternatives that will affect the order of such a listing
• Even the nature and wording of the letter of credit will eventually determine what level of security it offers the seller
• There are, in principle, only four basic methods of payment that are used today in connection with monetary settlement of international trade (apart from e-commerce and barter and counter-trade transactions)
• Things are more complex, particularly when it comes to the documentary methods of payment, which have many alternatives
• The most important factor is the difference in security they offer
• Basic methods of payment in security order

  • Cash in advance before delivery
  • Documentary letter of credit
  • Documentary collection
  • Bank transfer (based on open account trading terms)
  • Other payment mechanisms, such as barter or counter-trade
• The costs of the alternatives are mainly governed by what function the banks will have in connection with the execution of payment
• Other forms of fees, which can have an indirect connection to the payment, do sometimes arise, such as different charges related to the creation of the underlying documents, for example consular fees and stamp duties
• Other costs, such as payment of duties and taxes, are also governed by the agreed terms of delivery
• Bank charges will arise not only in the seller's but also in the buyer's country; they can vary hugely between different countries, both in size and, more importantly, in structure
• The best solution for both parties is often to agree to pay the bank charges in their respective country, but whatever the agreement, it should be included in the sales contract
• Bank charges groups

  • Standard fees for specified services - normally charged at a flat rate
  • Handling charges, i.e. for checking of documents - normally charged as a percentage on the underlying value of the transaction
  • Risk commissions, i.e. the issuing of guarantees and confirmation of letters of credit - normally charged as a percentage of the amount at a rate according to the estimated risk and the period of time
• Open account payment terms


  The seller delivers goods or services to the buyer without receiving cash, a bill of exchange or any other legally binding and enforceable undertaking at the time of delivery, and the buyer is expected to pay according to the terms of the sales contract and the seller's later invoice
• Bank transfer (bank remittance)

  1. Invoice sent upon delivery

  2. Invoice payment in the bank, normally in local currency

  3. Bank transfer through the SWIFT system

  4. Payment in local or foreign currency, according to invoice and/or seller's instructions
• Bank transfers are a method of 'clean payments', which predominate both in size and in number; more than 80 percent of all commercial international payments are estimated to be in this form
• The majority of all international trade is regional, where the commercial risk is generally regarded as low and open account terms traditionally used
• Even in individual cases where the seller would have preferred a safer method of payment, this can often be difficult to achieve owing to competition or established practice
• Nowadays, most bank transfers are processed through an internal bank network for international payments and messages, the so-called SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, in which more than 8,000 financial institutions around the world participate
• When the instructions are fed into the system by the buyer's bank it is normally available at the seller's chosen bank two banking days later, and usually available for the seller the next day or according to local practice
• Urgent SWIFT messages (express payments) are processed even faster, but at a higher fee
• It is also of great importance to use the correct address code system developed by SWIFT, the bank identifier code (BIC)
• Paying by check was once a common form of payment, but following the introduction of more cost-effective and faster ways of processing international bank transfers, this is no longer the case
• The corporate check (usually post-dated and mailed at due date by the buyer) will not be paid to the seller until it is received and presented to the seller's bank, usually with a considerably delayed value date
• Check payments


  1. Invoice sent upon delivery

  2. The check is sent as payment to the seller

  3. The seller receives payment from their bank, either with a longer deferred value date or in many cases only at the later stage when the check has been received by the buyer's bank)

  4. The check is 'cleared' between the banks

  5. The check is debited to the buyer's account
• If lost in transit to the seller, or delayed because of strikes or any other reason, the buyer can claim that they have paid by sending the check, but the seller has not received payment
• Documentary collection, also sometimes referred to as bank collection, is a method of payment where the seller’s and buyer’s banks assist by forwarding documents to the buyer against payment or some other obligation, often acceptance of an enclosed draft (bill of exchange).
• Types of documentary collection

  • Documents against payment - when the bank notifies the buyer that the documents have arrived and requests them to pay the amount as instructed by the seller's bank
  • Documents against acceptance - when the buyer is requested to accept a term draft (bill of exchange) that accompanies the documents instead of payment
• Documentary collection procedure


  1. After shipment, the seller prepares the documents which, together with their instructions, are sent to their bank

  2. The bank checks the seller's instructions and that they conform with the enclosed documents. They are then sent to the collection bank chosen by the buyer, together with instructions

  3. The buyer is advised about the collection. Before payment/acceptance, they have the right to inspect the documents
• Documentary collection


  A more secure alternative for the seller, compared to trading on open account payment terms
• Types of documentary collection

  • Documents against payment (D/P)
  • Documents against acceptance (D/A)
• Documentary collection procedure


  1. Seller prepares documents and sends to their bank

  2. Bank checks instructions and documents conform

  3. Documents sent to collection bank chosen by buyer

  4. Buyer advised about collection

  5. Buyer inspects documents before payment/acceptance

  6. Payment transferred to seller's bank
• Advantages of documentary collection for the seller


  • Goods not placed at the disposal of the buyer until they have paid or accepted the enclosed draft
• Disadvantages of documentary collection for the buyer


  • No opportunities to examine the goods before payment, buyer has to rely solely on the documents presented
• Actions the buyer can take to deal with the drawbacks of documentary collection


  1. Inspect the goods before shipment

  2. Use a company to inspect the goods

  3. Contractual right to postpone payment/acceptance until goods have arrived and then inspect them or take samples
• Letter of credit (L/C)


  A combination of a bank guarantee issued by a bank upon the request of the buyer in favor of the seller and a payment at sight or at a later stage against presentation of documents which conform to specified terms and conditions
• Advantages of L/C for the seller

  • Payment is guaranteed and there are fewer concerns about the buyer's ability to pay or about other restrictions or difficulties that may exist or arise in the buyer's country
• Advantages of Letter of Credit for the buyer


  • Assured that the stipulated documents will not be paid unless they conform to the terms of the Letter of Credit