The method of payment agreed upon by the seller and buyer determines the extent of their financial interest and indicates whether or not insurance should be obtained.
The seller should be aware that, due to differences in language, customs and currency, it is generally difficult (if not impossible), as well as expensive, to sue a foreign buyer for nonpayment. In international transactions, unless the seller is paid in full in advance, it would be wise for the seller to purchase his own insurance policy to guarantee payment in the event of physical loss or damage in transit.
The following definitions of payment methods indicate the extent of a seller's financial risk and illustrate the need to protect this risk by purchasing insurance.
Degree of Financial Risk: Buyer and Seller
|Method of Payment||Degree of Financial Risk||Principal Risk|
|Cash in Advance||None||Maximum||Non-shipment of, or loss or damage to, merchandise|
|Payment by Draft||Substantial||Minimal||Non-acceptance or non-payment|
|L/C Revocable||Maximum||Minimal||Default, insolvency loss or damage to merchandise|
|L/C Irrevocable||Minimal||Maximum||Default loss or damage|
|L/C Confirmed Irrevocable||Minimal Or none||Maximum||Bank insolvency, loss or damage to merchandise|