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Ocean Cargo Methods of Payment

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
Seller Buyer
Cash in Advance None Maximum Non-shipment of, or loss or damage to, merchandise
Open Account Substantial None Non-payment
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