There are four modes of payment prevalent in International Trade. These modes of payment are: Cash in Advance, Bills for Collection, Documentary Letters of Credit (LCs), and Open Account.

 Each of these payment modes is briefly discussed below:

 1.     Cash In Advance: Under this mode of payment, the buyer (importer) pays for the goods in advance to the seller (exporter) and awaits shipment of goods. This mode of payment is the most secure for the seller as they receive funds upfront and do not need to seek for trade finance facilities to cover their working capital position while the ordered goods are being produced, export licenses are being processed and goods are dispatched to the buyer (importer). For the buyer (importer) however, this mode of payment offers the least security as it involves upfront payment and places the buyer at the mercy of the exporter’s integrity. Cash In Advance (advanced payments) in Nigeria are often structured alongside Letters of credit. The Central Bank of Nigeria currently prescribes a maximum of 15% of the consignment value as Cash in Advance (advanced payment) and this must be backed by an advanced payment guarantee covering the same value of the advanced payment.

 2.     Documentary Collection: Under this mode of payment, a seller dispatches shipping and collection documents covering the goods dispatched through their bank (remitting bank) to the buyer’s bank (collecting bank) for eventual release to the buyer (importer) according to instructions listed in a cover letter bearing collection instructions. In line with the instructions received, the buyer’s bank (collecting bank) either releases documents at sight (documents against payment) or by acceptance (documents against acceptance). The latter (document against acceptance) involves the use of a bill of exchange which the buyer has to sign, signifying an acceptance of an obligation to settle the invoice value of the shipment on a fixed future date stated in the bill of exchange.

 3.     Letter of Credit: A letter of credit is an irrevocable undertaking of an issuing bank to pay a seller upon the presentation of credit-complying documents. Compared to other modes of payment, letters of credit are expensive. They can be issued as unconfirmed (with the obligation to pay solely resting on the bank that issues it) or confirmed instruments. A confirmed letter of credit bears an additional promise of a correspondent bank to pay the seller (beneficiary) upon the presentation of credit-compliant documents. Letters of Credit are governed by guidelines known as the Uniform Customs and Practice (UCP 600).

 4.     Open Account: In an open account transaction, the seller exports goods to the buyer (importer) in advance and then awaits payment from the buyer. This mode of payment provides the least form of security for the seller as it places the seller at the mercy of the buyer. The buyer would normally be expected to sell the goods and then repay the seller with proceeds gained from the sale of the goods. Currently, the Central Bank of Nigeria does not permit the usage of open account as a mode of payment for international trade transactions.

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