Export payment methods compared: advance, letter of credit, D/P, D/A and open account

Every international trade deal has a tension at its heart: the exporter wants to be paid before letting go of the goods, and the importer wants the goods before paying. Payment terms decide who carries that risk. Choosing them well protects your cash and your relationships.

This guide explains the five common payment methods, from safest for the exporter to safest for the importer.

1. Advance payment (cash in advance)

The importer pays all or part of the value before the goods are shipped.

• Exporter risk: lowest. You have the money before you ship.
• Importer risk: highest. They rely on the exporter shipping the right goods on time.
• When it's used: new relationships where the exporter has bargaining power, small orders, custom-made goods, or buyers in high-risk markets.

A common compromise is a partial advance, such as 30% with the order and the balance against shipping documents or before dispatch.

2. Letter of credit (LC)

A letter of credit is a promise from the importer's bank to pay the exporter, provided the exporter presents documents that comply exactly with the LC's terms. Most LCs follow the ICC's UCP 600 rules.

How it works, in brief:

1. Buyer and seller agree to use an LC in the sales contract.
2. The importer asks its bank (the issuing bank) to open an LC in the exporter's favour.
3. The exporter's bank (the advising bank) checks and forwards the LC to the exporter.
4. The exporter ships the goods and presents the required documents, such as invoice, packing list, bill of lading, certificate of origin and inspection certificate.
5. If the documents comply, the bank pays (at sight) or accepts to pay at a future date (usance LC).

• Exporter risk: low, provided documents are perfect and the issuing bank is sound. A confirmed LC, where a bank in the exporter's country also guarantees payment, removes the issuing bank and country risk.
• Importer risk: moderate. Banks deal in documents, not goods, so the importer relies on documents (and any inspection certificate) to reflect what was shipped.
• Cost: bank charges for both sides.

The big practical risk is discrepancies. Banks can refuse payment if documents don't match the LC exactly: a misspelt name, a late shipment date, a weight that differs between documents. Read every LC carefully when you receive it and ask for amendments before you ship if any term can't be met.

3. Documents against payment (D/P)

D/P is a type of documentary collection, usually under the ICC's URC 522 rules. The exporter ships the goods and sends the documents through their bank to the importer's bank, with instructions to release them only when the importer pays.

• Exporter risk: moderate. The importer can't take the goods without paying, but they can refuse to pay. Then the exporter's goods are sitting at a foreign port, facing storage charges, return freight or a distressed sale.
• Importer risk: low to moderate.
• Cost: cheaper than an LC.

D/P works best with buyers you trust who prefer to avoid LC costs.

4. Documents against acceptance (D/A)

Similar to D/P, but the importer's bank releases the documents when the importer accepts a bill of exchange, a promise to pay on a future date (for example 60 or 90 days).

• Exporter risk: high. The importer gets the goods before paying, and the exporter relies on their promise.
• Importer risk: low. It's effectively credit from the exporter.

D/A suits established relationships. Exporters sometimes use export credit insurance or discount the accepted bill with their bank to get cash earlier.

5. Open account

The exporter ships the goods and sends the documents directly to the importer, who pays on agreed terms, for example 30, 60 or 90 days after the invoice or shipment.

• Exporter risk: highest.
• Importer risk: lowest.
• When it's used: long-standing relationships, and markets where buyers expect credit.

Open account is common in competitive markets because it's simple and cheap for buyers. Exporters manage the risk with:

• credit insurance: in India, ECGC offers policies covering buyer and country risk
• factoring and invoice discounting, which turn receivables into cash
• credit checks and limits on each buyer

Choosing the right terms

Consider:

• How well you know the buyer: new buyers justify more security; trusted ones can get easier terms.
• Country risk: political and economic stability, currency controls and the strength of local banks.
• Order size: large orders deserve more protection.
• Competition: if competitors offer open account, insisting on advance may cost you business.
• Your cash flow: can you wait 90 days for payment?
• Cost: LCs are secure but have bank charges and paperwork.

A common path is to start a new relationship with advance or LC terms, move to D/P after several successful orders, and eventually offer D/A or open account backed by credit insurance.

Tips for exporters

• Make sure your contract clearly states the payment method, currency, due date, documents required and Incoterm.
• Keep every document consistent: description, quantities, weights, dates.
• Ship within the agreed time, and present documents promptly.
• Follow up on payments; know your bank's processes for collections and LCs.

Tips for importers

• Use inspection certificates to protect yourself under LCs and D/P.
• Verify the supplier before paying an advance (see our guide on how to verify a supplier).
• Negotiate partial advances and balance against documents as a middle ground.

Frequently asked questions

What is the safest payment method for exporters?

Advance payment is the safest for the exporter. A confirmed letter of credit is the next safest, provided the documents comply exactly with its terms.

What is the difference between D/P and D/A?

Under D/P, the importer gets the shipping documents only after paying. Under D/A, the importer gets them after accepting a bill of exchange promising to pay later, so the exporter extends credit.

Why do banks reject LC documents?

Because of discrepancies: details that don't match the LC exactly, such as names, descriptions, dates, quantities or missing documents. Banks examine documents, not goods.

How can exporters reduce open-account risk?

Use credit checks and limits, export credit insurance (ECGC in India), and factoring or invoice discounting to turn receivables into cash sooner.

Find trade partners on GlobalMart

Use GlobalMart to compare suppliers and post a requirement to get quotes. Our guide to Incoterms explains how delivery terms fit with payment terms.