Canadian Accredited Insurance Broker (CAIB) Three Practice Exam

Which method of payment in international trade is used when the buyer is not well known to the seller?

1. Open Account

2. Cash in Advance

3. Letter of Credit

4. Documentary Collection

The correct answer is: Cash in Advance

In international trade, when a buyer is not well known to the seller, the method of payment typically utilized is Cash in Advance. This payment method requires the buyer to pay the seller in full before the goods are shipped. It offers the highest level of security for the seller, as they receive payment upfront, ensuring that they are compensated before taking on the risk of shipping products, particularly to an unfamiliar buyer. Using Cash in Advance minimizes the risk of non-payment or fraud, which is especially crucial when entering into transactions with buyers whose creditworthiness is uncertain. Sellers often prefer this method in situations where trust has not yet been established and where the buyer's reliability cannot be easily verified. Other methods of payment, such as Open Account, Letter of Credit, and Documentary Collection, involve varying degrees of risk and may not provide the same level of security as Cash in Advance. Open Account, for example, allows buyers to receive goods before payment, which can be risky for sellers if they do not know the buyer well. A Letter of Credit and Documentary Collection offer some protection but require established relationships and trust; they depend on banks to facilitate transactions and provide guarantees.