Payment terms in international trade: a buyer's guide

Payment terms decide who is exposed, and for how long, if something goes wrong. A good price on poor terms can be a bad deal, and the reverse is also true. For a buyer, the aim is terms that protect your money without making you an unattractive customer.

This guide compares the main payment methods used in cross-border trade. It is general information, not financial advice. Banking practice, fees and foreign exchange rules vary by country and bank, so confirm the details with your own bank.

The risk spectrum

Every payment method sits somewhere between two extremes. At one end the buyer pays before shipment and carries all the risk. At the other the seller ships and waits for payment, carrying all the risk. Everything else is a compromise.

Advance payment

The buyer pays all or part of the price before the goods ship, normally by bank transfer, often called T/T (telegraphic transfer).

In practice, full prepayment is unusual for larger orders. A common pattern is a deposit when the order is confirmed and the balance later, for example before shipment or against a copy of the bill of lading. The split is negotiated and depends on the product, the order size and how well the parties know each other.

For the buyer: this is the riskiest method. Reduce the exposure by keeping the deposit proportionate, verifying the supplier first, linking the balance to an inspection report or shipping documents, and paying only to a company account in the supplier's legal name. Our supplier verification checklist covers these checks.

Letters of credit

A letter of credit is a bank's undertaking to pay the seller once the seller presents documents that match the credit. It gives the seller bank security and gives the buyer evidence of shipment before payment.

It suits larger orders and new relationships, but it adds bank fees, paperwork and strict deadlines. The bank checks documents, not goods, so buyers who care about quality should require an independent inspection certificate. See letters of credit explained for the full process.

Documentary collections

In a documentary collection, the seller ships the goods and sends the shipping documents through its bank to the buyer's bank, with instructions to release them on certain conditions. Banks handle the documents but, unlike a letter of credit, they do not promise to pay. Collections are normally handled under the ICC's Uniform Rules for Collections (URC 522).

There are two forms:

• Documents against payment (D/P). The buyer's bank releases the documents only when the buyer pays. Without the documents, the buyer normally cannot collect goods shipped under a negotiable bill of lading.
• Documents against acceptance (D/A). The bank releases the documents when the buyer accepts a bill of exchange promising to pay on a future date. The buyer receives the goods before paying.

Collections cost less and involve less paperwork than letters of credit. They suit parties who already have some trust in each other.

Open account

The seller ships the goods and sends the documents directly to the buyer, who pays an agreed number of days later. This is the most favourable method for the buyer and the standard arrangement in many long-established trading relationships.

Sellers who offer open account often protect themselves with export credit insurance or by financing their receivables. Expect to be asked for trade references or financial information before these terms are offered.

How to choose

Ask five questions.

1. How well do you know the supplier? New relationships justify more protection; proven ones can move to simpler terms.
2. How large is the order relative to your business? The more a loss would hurt, the more security is worth paying for.
3. How standard is the product? Custom goods that the supplier cannot resell justify a larger deposit from the supplier's point of view.
4. What can your cash flow support? Deposits and letters of credit both tie up funds or credit lines for weeks.
5. What do your bank and regulations allow? Some countries restrict advance payments abroad or require specific documents for foreign currency transfers. Your bank can tell you what applies.

A typical progression is a letter of credit or a modest deposit on the first orders, then deposit with balance against documents, then open account as trust builds.

Clauses to settle alongside the payment method

• Currency, and who bears the exchange-rate risk between order and payment.
• Trigger for each payment: order confirmation, inspection report, bill of lading date or arrival.
• Documents required for each payment and who issues them.
• Bank charges: who pays the charges of each bank.
• Late payment and late shipment: what happens in each case.
• Bank details: how any change will be notified and confirmed.

Payment terms and Incoterms are separate. The Incoterm sets delivery, cost and risk; it says nothing about when or how you pay. Both need to be stated in the contract. Our guide to Incoterms 2020 covers the delivery side.

Talk to us about your order

When you request a quote, tell us your preferred payment method along with the product, quantity and destination. Clear terms from the start make quotes easier to compare.