Foreign trade payment collection methods: comprehensive analysis of letters of credit and wire transfers

In international trade, there are many ways to collect payment, among which Letter of Credit (L/C) and Telegraphic Transfer (T/T) are the two most commonly used. This article will comprehensively analyze the characteristics, processes and precautions of these two payment methods to provide a reference for exporters.

Basic principles of letter of credit payment

A letter of credit is a conditional commitment to pay document that a foreign businessman entrusts a bank to issue according to the requirements of the contract. It details the requirements for the commodities, quantity, quality and delivery time of the transaction, and also stipulates the types and production requirements of the required documents. For exporters, after preparing the goods according to the letter of credit and collecting a full set of documents, they must be submitted to the bank within the specified time limit. The payment can be made after the bank approves the approval.

The use of letters of credit guarantees both buyers and sellers and places the greatest responsibility on the bank. Therefore, the handling fees charged by banks are usually higher, resulting in increased transaction costs. Letters of credit are often not preferred when working with trusted business partners or when conducting low-value transactions. However, letters of credit are very effective in preventing defaults and resolving prepayment difficulties, eliminating the need for exporters to rely too much on advance payments from foreign companies, thus reducing the burden on foreign companies.

Risks and challenges of letters of credit

In a letter of credit transaction, the bank verifies whether the contract has been fulfilled based on the full set of foreign trade documents provided by the exporter, so the accuracy of the documents is extremely high. Any minor errors, such as spelling errors, may lead to discrepancy, which may affect the bank’s willingness to pay. In the event of a discrepancy, the bank will no longer guarantee payment, potentially exposing the exporter to the risk of default.

The most noteworthy thing is that since July 2007, international letter of credit operations have been adjusted in an attempt to reduce the occurrence of fraud. For example, certain errors that do not affect the validity of the document are no longer harshly punished. Nonetheless, as the regulations of banks in various countries are slightly different, exporters still need to fully understand the terms of the letter of credit and potential transaction traps to prevent discrepancies from occurring and ensure smooth collection of payments.

The efficiency and convenience of wire transfer payment

Telegraphic transfer (T/T) is a way for foreign businessmen to directly transfer payment to the exporter’s bank account. In order to conduct wire transfer, the exporter needs to open a foreign currency (USD) account in the bank and provide a remittance path to the foreign businessman. Under normal circumstances, the two parties will negotiate the remittance time. A common practice is to ask the foreign businessman to wire a partial advance payment after the payment is made to protect the interests of the exporter.

After the transaction is completed, the exporter notifies the foreign businessman to wire the balance with the bill of lading provided by the freight forwarder. After receiving the remaining payment, the exporter will send the full set of foreign trade documents to the foreign businessman via international express delivery, and the transaction will be completed.

Wire transfer fees and security

Banks usually charge handling fees for wire transfers, especially when transferring small amounts (such as less than 1,000 US dollars), the handling fees may account for a large part. For small transactions, consider using personal credit cards, online payment platforms (such as PayPal) or Western Union to reduce transaction costs. Although wire transfers are safer for exporters, they still need to be handled with caution as sometimes exporters may be at risk of fake documents.

In some cases, exporters and foreign businessmen can adopt the “Document against Payment” (D/P) method, that is, the bank will coordinate the collection of payment after shipment. This method is especially popular when both parties are not familiar with each other and can reduce their respective risks.

Summary

Letter of credit and wire transfer have their own advantages and disadvantages in international trade. Exporters need to flexibly choose the appropriate payment method based on specific transaction conditions. Understanding the characteristics and potential risks of each transaction method will help exporters succeed in complex foreign markets.