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Advance Payment
Advance Payment
This trade payment method is prevalent for transactions where the seller has a much higher bargaining power than the buyer. Such payment method may also be employed where the buyer may not have the ability to open letters of credit (formally called Documentary Credits) through their bank/s. It is also possible that the buyer is a cash rich company and therefore wants to avail a cash discount from the seller.
Obviously, the inherent risk in the transaction is borne by the buyer which involves performance risk on the exporter as well as country risk where cross-border trade in involved. Risk mitigants for the buyer could be an established relationship with the seller, or any mutual dependence between the buyer & the seller. Bank Guarantee from the seller covering the performance risk could also provide comfort to the buyer.
The schematic below elucidates Advance Payment transaction flow:
