Payment can be defined as the process or means of settling financial or business transactions. It is also referred to as the settlement of outstanding debts between a creditor and a buyer. Payment can be made using various means. In foreign or home trade, settlement of debts can take various forms.


Factors Determining the Method of Payment

  1. The total amount of money involved.
  2. The cost of the means of payment.
  3. The urgency of payment.
  4. The type of account kept by the debtor.
  5. The safety of money.
  6. The date when payment is due.
  7. Distance between the payer and receiver.



There are various means of payment or settlement for financial or business transactions.

These can be classified as:

  1. Legal tender.
  2. Payment through bank.
  3. Means of payment provided by the post office.
  4. Businessmen’s means of payment.


Legal Tender

Legal tender is a form of payment by which a creditor is compelled by the law of a state to accept in settlement of debt. This is referred to as cash and it is the commonest means of payment. Coins and notes are legal tenders because they must be accepted by a creditor for debt settlement as required by law. They include:

  • Bank Notes: Bank notes are slip of papers or currency notes issued by the banks. They have their origin in the receipts that goldsmiths gave for precious metals deposited with them. Bank notes are in different denominations and are portable. In Nigeria for example, bank notes include: N5, N10, N20, N50, N100, N200, N500 and N1000.
  • Coins: Coins are precious metallic currency made of silver. They can have a public stamp placed on them and are always in different shapes. Coins are homogenous and indestructible. They are in different denominations, Examples are 10k, 25k, 50k in Nigeria.


Payment Through the Bank

  1. Cheques: Cheque is an order written by the drawer to a bank to pay on demand a specified sum of money to the person named in it as payee. It is portable. Cheques are demands on the bank by the account holder to pay the stated amount. All institutions accept cheques in settlement of debts.
  2. Standing Order: Standing order is an order or instruction by an account holder to the bank to pay a certain sum of money on his behalf at regular intervals to a named person or organisation, e.g. insurance premium. It can be paid weekly, monthly or quarterly.
  3. Bank Draft: Bank draft is a cheque drawn on a bank. It is a safe means of payment. Draft is a cheque drawn on a bank by itself or its agent. It is used by a debtor when his creditor is unwilling to accept a personal cheque. The debtor pays the bank for it at the time of issue.
  4. Credit Transfer (Bank Giro): Credit transfer is also a method of payment whereby a customer’s bank pays directly into the bank account of the creditor. He has already the name, account number, address of the bank of the creditor. It can also be referred to as a payment made on instruction to a bank to credit a creditor in the same or other bank.
  5. Travellers Cheque: A travellers cheque is an order drawn on commercial bank which travellers and businessmen can use as means of payment in the settlement of debts. To prevent misuse, they have to be signed in the presence of the bank clerk who issued them and countersigned when cashing it.
  6. Certified Cheque: Certified cheque is a cheque which has been ratified by the bank on behalf of its customer to guarantee that the cheque will be paid. It is also a means of payment.
  7. Direct Debit: Direct debit is a transfer system in which a creditor by agreement with the debtor gave instruction to the debtor’s bank to pay him a specified amount by debiting the account of the debtor and crediting his own account. This is good for products in which quantity delivered are not constant.


Means of Payment Provided by the Post Office

  1. Postage Stamps: Postage stamp is a means of payment by which small sums can be sent by post. Postage stamps are used in settlement of small amount on items being purchased, such as sending for samples. Post office accepts commission for this service.
  2. Postal Orders: Postal orders are means of payment provided by the post office for transfer of small sums of money. Postal order of fixed denominations can be bought at post offices. A commission, known as poundage is charged on postal order purchased. The sender fills the names of the person to be paid and can only be cashed by him. It is not negotiable.
  3. Money Orders: Money orders as a means of payment are issued for larger amount of money than postal orders. Money orders are issued out after completing a form at a post office. It is good for a person without a current account. Commission is also charged on the money order.
  4. Telegraphic Money Order: Telegraphic money order is used when it is desired to remit a sum of money as fast as possible. The cost of dispatching the money ordered by telegram will be charged to the sender.
  5. Postal Giro: Postal giro is a means of making monetary transfer through the post office. All accounts are kept in such a way that debts can be settled by transfer from one account to another or through giro cheques. Here, people open accounts with the post office.


Businessmen’s Means of Payment

  1. Bill of Exchange: Bill of exchange is an unconditional order in writing, addressed by the seller to the buyer, requesting the person to whom it is addressed to pay on demand a certain sum of money at a particular time.
  2. I Owe You (IOU): IOU is a written acknowledgement or undertaking of an outstanding debt. IOU is not a legal document. It is a non negotiable evidence of debt consisting of a written account.
  3. Promissory Note: Promissory note is an unconditional promise written and signed by a debtor to a creditor agreeing to pay on demand a certain sum of money to the creditor at a specified date.

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