Payment terms in international trade, from safest to riskiest
The four main methods
| Method | How it works | Risk for the buyer | Risk for the seller |
|---|---|---|---|
| Cash in advance | Buyer pays before the goods ship | High | Very low |
| Letter of credit (LC) | Buyer's bank promises to pay once the seller presents documents that match the LC | Low | Low |
| Documentary collection | Banks release shipping documents against payment (D/P) or against acceptance of a bill (D/A) | Medium-low | Medium |
| Open account | Goods ship first, buyer pays later, often 30 to 90 days | Very low | High |
Cash in advance
Simple, and normal for samples and small orders. On a first larger order with an unknown supplier, it puts all the risk on the buyer. A common compromise is a 30% deposit, with the balance paid against a copy of the bill of lading.
Letters of credit
Most letters of credit follow the ICC's rules, known as UCP 600. The bank pays only if the documents presented, such as the invoice, bill of lading and certificate of origin, match the LC exactly. A misspelt name or a date that doesn't match can delay payment. If you're the seller, read the LC the day it arrives and ask for corrections straight away. If you're the buyer, don't ask for documents the seller can't realistically get.
Documentary collections
Cheaper than an LC, but the bank doesn't guarantee payment. With D/P (documents against payment), the buyer gets the documents needed to clear the goods only after paying. With D/A (documents against acceptance), the buyer gets them after promising to pay later, which is riskier for the seller.
Open account
Usual between long-standing partners. Sellers often protect themselves with export credit insurance. In India, ECGC offers this.
Choosing a method
- New relationship and large order: LC, or deposit plus balance against documents
- Repeat business with a good record: collection or open account
- Samples and trial orders: advance payment by bank transfer or a secure online method
The fraud that catches people
Business email compromise is common in trade. A fraudster takes over or imitates the supplier's email and sends "updated" bank details just before payment is due. Always confirm a change of account by phone, using a number you already had, and check that the account name matches the company.
Shipment records can also tell you whether a counterparty has a real trading history before you agree terms. See how to check a supplier.