What method of payment is preferred by exporters for its lower risk?

Exporters typically prefer the method of payment that minimizes their financial risk, and a letter of credit is well-suited for this purpose. A letter of credit is a document issued by a bank on behalf of a buyer, guaranteeing that the seller will receive the payment as long as the specified conditions are met. This adds an extra layer of security for exporters, as it mitigates the risk of non-payment and provides assurance that funds will be available once they fulfill their part of the transaction.

In international trade, where trust may be limited and buyers and sellers may operate in different legal systems, the letter of credit provides a reliable mechanism for conducting transactions. It ensures that the bank, which has assessed the buyer's creditworthiness, will disburse funds once the seller presents the necessary shipping documents that comply with the terms set in the letter.

The other payment methods carry varying degrees of risk. Cash in advance requires the buyer to pay before goods are shipped, reducing the risk for the exporter but potentially discouraging buyers. An open account allows for goods to be shipped without immediate payment, which increases the risk for the exporter, as there is no guarantee of payment. Accounts receivable represent amounts owed for goods already delivered but similarly involve risk, as the exporter has