- Every payment method shifts risk between buyer and seller. The more one side is protected, the more the other side is exposed.
- A split telegraphic transfer, such as a deposit before production and the balance before shipment, is common practice for small and mid-sized orders.
- Letters of credit give strong protection to both parties but cost more and fail if the documents contain discrepancies.
- Currency movements, bank charges and financing costs belong in your landed cost, not in a footnote.
Agreeing on a price is only half of a trade deal. The other half is deciding when money moves and what the buyer gets in return. Payment terms decide who carries the risk if a factory never ships, a buyer never pays, or a container arrives with the wrong goods. This guide explains the main methods, how they compare, and how to pick terms that protect cash flow without scaring off good partners.
The risk ladder: who is exposed under each method
Think of payment terms as a ladder. At one end the buyer pays before anything is made; at the other the seller ships first and waits to be paid.
- Cash in advance – the buyer pays in full before production or shipment. Safest for the seller, riskiest for the buyer.
- Letter of credit (LC) – a bank promises to pay the seller once compliant documents are presented. Balanced protection, higher cost and paperwork.
- Documentary collection, documents against payment (D/P) – banks hand over the shipping documents only when the buyer pays. The seller keeps control of the goods but has no bank guarantee of payment.
- Documentary collection, documents against acceptance (D/A) – the buyer gets the documents by accepting a bill of exchange promising to pay at a later date. More risk for the seller.
- Open account – the seller ships and invoices, and the buyer pays on agreed credit terms, for example 30 or 60 days. Safest for the buyer, riskiest for the seller.
New relationships usually start near the top of the ladder and move down as trust builds. A buyer placing a fifth repeat order with a reliable supplier can reasonably ask for better terms than on the first order.
Telegraphic transfer and deposit structures
A telegraphic transfer (T/T, or wire transfer) is how most small importers pay overseas suppliers. It is fast, but once sent it is very hard to recall, so buyers rarely pay 100% upfront to a new supplier. A 30% deposit with the order and 70% balance later is common practice, though 50/50 and other splits are also used. What matters most is the trigger for the balance:
- Balance before shipment – you pay after production but before the goods leave. Pair this with a pre-shipment inspection so you are not paying for goods you have never seen checked.
- Balance against a copy of the bill of lading – you pay once the goods are on board and the supplier sends a copy of the transport document. This proves shipment but the supplier still holds the originals until paid.
- Balance on arrival – rarer with new suppliers, but sometimes possible for repeat orders.
An importer orders 2,000 kitchen storage sets. They pay a 30% deposit to start production, book an independent inspection when production is complete, and release the 70% balance only after the inspection report passes. If the inspection fails, the balance is held while the factory reworks the goods.
Letters of credit: how they work
A letter of credit is a written undertaking by the buyer's bank (the issuing bank) to pay the seller a set amount, provided the seller presents documents that comply exactly with the LC terms. Most LCs are issued subject to UCP 600, the set of rules for documentary credits published by the International Chamber of Commerce.
The typical sequence
- The buyer applies to their bank, which checks the buyer's credit and issues the LC on the terms agreed in the sales contract.
- An advising bank in the seller's country passes it on. For extra security, a local bank can confirm it, adding its own payment promise.
- The seller ships and presents the required documents, such as invoice, packing list, bill of lading and certificates, before the deadline.
- If the documents comply, the bank pays, either at sight or at a later date for a usance LC, and the buyer receives the documents needed to claim the goods.
Costs and pitfalls
Banks charge for issuing, advising, confirming, amending and examining documents, so LCs are rarely worthwhile for small orders. Ask your bank for its fee schedule. The biggest practical risk is a discrepancy: a spelling mismatch, a late shipment date, a missing certificate or a description that differs from the LC wording. It lets the bank refuse payment until the buyer waives the issue, so sellers should review the draft LC and request amendments to anything they cannot meet. Banks deal in documents, not goods, so many buyers require an inspection certificate as one of the documents.
Documentary collections: D/P and D/A
With a documentary collection, the seller's bank sends the shipping documents to the buyer's bank with release instructions. Banks act as messengers rather than guarantors, so collections are cheaper and simpler than LCs.
- D/P (documents against payment): documents are released only when the buyer pays. If the buyer refuses, the seller still controls the goods but may face storage, return freight or a distressed sale.
- D/A (documents against acceptance): the buyer accepts a bill of exchange, gets the documents straight away and pays on the due date. The seller has given up control of the goods.
Collections suit parties who already have some trust.
Escrow and platform payment protection
Many online B2B marketplaces and some independent providers offer escrow or trade-assurance style services. The buyer pays into a holding account, the seller ships, and the funds are released when the buyer confirms receipt or a set period passes without a dispute. These services can suit smaller orders where an LC is too expensive.
Read the terms closely: what counts as a valid claim, the deadline to raise it, whether quality disputes are covered, and the fees. Pay only through the service's official checkout, never to an account sent in a chat message. Our guide to avoiding supplier scams covers fake escrow sites and bank-detail fraud.
Open account, trade credit insurance and supply-chain finance
Open account is standard in many mature relationships. For the seller, the danger is non-payment or slow payment. Two tools help:
- Trade credit insurance covers the seller against a buyer's insolvency or prolonged default, usually up to a limit the insurer sets for each buyer. Many countries also have a government-backed export credit agency.
- Supply-chain finance (sometimes called reverse factoring) lets a supplier be paid early on approved invoices, based on the buyer's credit strength, while the buyer still pays on the original due date. Related tools include invoice factoring and pre-shipment finance.
Comparing the methods
| Method | Buyer risk | Seller risk | Relative cost | Best suited to |
|---|---|---|---|---|
| Cash in advance (T/T) | High | Very low | Low | Samples, small first orders, strong supplier leverage |
| Split T/T (deposit + balance) | Medium | Low to medium | Low | Most small and mid-sized orders with inspection |
| Letter of credit | Low to medium | Low | High | Large orders, new relationships, higher-risk markets |
| Documentary collection (D/P) | Low | Medium | Medium | Established partners wanting bank handling of documents |
| Documentary collection (D/A) | Very low | High | Medium | Trusted buyers needing credit |
| Escrow / platform protection | Low to medium | Low to medium | Medium | Smaller online B2B orders |
| Open account | Very low | Very high | Low | Long-standing relationships, insured receivables |
Managing currency risk and bank charges
If you buy in one currency and sell in another, exchange-rate swings can erode your margin between order and payment. Options include pricing in your own currency, holding a foreign-currency account, or a forward contract with your bank to fix a future rate. Ask your bank what it offers and what it costs.
Also agree who pays transfer fees; intermediary bank charges can leave the supplier short. Many buyers agree that each side pays its own bank's fees. Use our currency converter for quick estimates, then include FX buffers and bank costs in your landed cost calculation.
Put the payment method, amounts, triggers, currency, bank-charge split and Incoterm in the purchase order or sales contract. Verbal agreements on payment terms are a common source of disputes.
If you are unsure which terms to propose on a new order, you can ask for expert help or include your preferred terms when you post a buying request so suppliers quote on the same basis.
Frequently asked questions
What is the safest payment method for a first order from a new supplier?
For larger orders, a letter of credit offers strong protection because the bank pays only against compliant documents, ideally including an inspection certificate. For smaller orders, a split telegraphic transfer with the balance released after a passed pre-shipment inspection is a common and practical choice.
Is a 30/70 deposit split standard?
It is common practice but not a rule. Splits such as 50/50 or 20/80 are also used, and terms often improve as the relationship matures. Focus on what triggers the balance payment as much as on the percentages.
What is a discrepancy in a letter of credit?
A discrepancy is any way the presented documents fail to match the LC terms, such as a late shipment date, a missing document or an inconsistent description. It allows the bank to refuse payment unless the buyer agrees to waive it.
Do I need trade credit insurance?
If you sell on open account and a single buyer's default would seriously hurt your business, credit insurance is worth investigating. Speak with an insurance broker or your country's export credit agency about coverage and costs.
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This guide is general education, not legal, tax or customs advice. Rules change and vary by country — confirm details with your customs authority or a licensed broker before you ship. Spotted something out of date? Tell us.