This lesson examines the specific payment and collection techniques used in international trade and their associated risk profiles. The ACT syllabus requires the evaluation of alternative payment and collection techniques to manage the risks associated with trade flows .

7.1 The Four Main Payment Terms

The syllabus covers the four main terms of payment: open account, documentary collection, letter of credit, and cash in advance . Each term offers a different balance of risk between the buyer and seller, and the selection criteria for appropriate risk management solutions are critical .

7.2 Documentary Collections and Letters of Credit

Documentary collections involve banks mediating the exchange of documents for payment without providing a guarantee . The syllabus covers the operational requirements and legal positions of both buyer and seller. Letters of credit (LCs) are a bank’s undertaking to pay the seller, subject to presentation of compliant documents. The syllabus covers the operation and management of LCs, the responsibilities of banks, and the formalities with which the seller must comply .

7.3 Bonds and Guarantees

Bonds and guarantees are another risk management tool, including on-demand bonds, conditional bonds, and different types of bonds/guarantees found in international trade. The syllabus covers the role of bonds/guarantees and the management of risks inherent in them .