What are the methods of foreign exchange settlement? Introduction to the 5 most common methods

Foreign trade requires foreign exchange settlement, which means that the owner of foreign exchange income sells his foreign exchange income to a designated foreign exchange bank. Then the bank pays him the equivalent amount of local currency at a certain exchange rate. What are the ways to settle foreign exchange?

Common ways of foreign trade settlement:

1. L/C letter of credit. L/C letter of credit refers to a written document in which a bank pays the beneficiary or designated party based on the specified documents according to the applicant's request or initiative application, provided that the terms of the letter of credit are met. A letter of credit is a written document issued by a bank that conditionally promises to pay, which is safer than other foreign trade settlement methods. Letters of credit can be divided into sight letters of credit and usance letters of credit, and can also be divided into regular settlement, export pre-sale, and settlement upon receipt of payment according to different situations.

2. D/P. D/P refers to a settlement method in which the collecting bank can only hand over the shipping documents to the importer after the importer has paid the full amount of the goods. D/P is a payment and document exchange method through the bank. The bill of lading is a valuable document and cannot be used for other modes of transportation. If the mode of transportation is other than sea transportation, the function of the D/P payment method will be lost, and there will be a risk of foreign exchange collection.

3. T/T wire transfer. T/T wire transfer is settled in foreign exchange. The buyer remits the money to the foreign exchange bank designated by the seller. The buyer can request payment within a certain period after the goods arrive. T/T is a commercial credit, which means that the decision on payment lies with the customer. T/T is divided into immediate payment and deferred payment. Relatively speaking, it has higher risks than L/C letters of credit, but the advantage is that the handling fee is cheaper than L/C.

4. M/T remittance. Remittance by mail means that the importer pays the local currency to the local bank, and the bank issues a payment authorization letter and sends it to the foreign branch or agent bank by airmail to handle the foreign exchange payment business. If the remittance is adopted, the whole process will take a long time.

5. O/A accounting. O/A accounting is also called credit sales, which means that the seller delivers the goods to the buyer when the buyer promises to pay the price in one quarter, half a year or one year. This settlement method belongs to commercial credit. Whether the exporter can receive the full payment depends entirely on the credit of the importer. Therefore, in this case, it is very important to investigate and verify the credit of the importer. O/A accounting is a very risky foreign trade settlement method in international trade. It is generally used for old customers with good reputation. It needs to be used with caution.

Generally speaking, there are five common ways to settle foreign exchange, namely: L/C letter of credit, D/P documents against payment, T/T wire transfer, M/T mail transfer and O/A accounting.