Payment Terms: Cash, D/P, D/A, L/C

Risk Spectrum

Payment terms range from maximum seller security (cash in advance) to maximum buyer security (open account). Between these extremes: documentary collections (D/P, D/A) offer bank intermediation without guarantee; Letters of Credit provide bank-guaranteed payment upon document presentation.

Types of Payment Terms

Term	Risk to Seller	Risk to Buyer	Bank Role
Cash in Advance	Lowest	Highest	Wire transfer only
Letter of Credit	Low	Low-Medium	Issues payment guarantee
Documentary Collection (D/P)	Medium	Medium	Holds documents until payment
Documentary Collection (D/A)	Higher	Lower	Holds documents until acceptance
Open Account	Highest	Lowest	None

Cash in Advance

Most secure for sellers; highest risk for buyers. Seller dispatches goods only after receiving full (or partial) upfront payment via wire transfer (TT payment).

Aspect	Details
TT payment	Telegraphic Transfer-electronic wire transfer, usually irrevocable
Common use	Stock products, expedited orders, urgent maintenance
Rare in projects	EPC contractors/end-users typically reject full cash in advance

Buyer Risk Mitigation:

Method	How It Works
Split payment	20-30% advance + balance at shipping (proof: Bill of Lading)
Advance Payment Guarantee	Bank guarantee refunding advance if seller fails to deliver

Open Account

Highest risk for sellers; most favorable for buyers. Supplier ships goods with payment due 30-90+ days later.

When Used	Details
Established relationships	Long history of prompt payments
Power imbalance	Supplier has less bargaining power than buyer
Early payment discounts	2/10 net 30 (2% discount if paid in 10 days)

Seller Risk Mitigation:

Method	How It Works
Credit insurance	Protects against buyer insolvency/default (not payment disputes)
Partial advance	Request downpayment, especially for bespoke goods
Upgrade terms	Propose documentary collection or LC (often rejected by large buyers)

Credit Insurance Limitations

Credit insurance covers buyer bankruptcy/insolvency-not payment disputes. If the buyer refuses payment due to claimed defects or delivery issues, the seller must pursue legal resolution.

Pro Tip

Before extending open account terms to a new customer, request trade references and actually call them. Ask specifically: “Do they pay on time? Have they ever disputed invoices?” A company’s financials may look solid, but payment behavior varies wildly. One slow-paying customer can wreck your cash flow.

Documentary Collection (D/P and D/A)

Banks facilitate document/payment exchange but do not guarantee payment. The seller ships goods, then submits shipping documents to their bank with collection instructions.

Term	Also Called	Documents Released When	Risk Level
D/P	CAD (Cash Against Documents)	Buyer pays	Lower for seller
D/A	Documents Against Acceptance	Buyer accepts time draft	Higher for seller

Workflow:

1. Seller ships goods → submits documents + collection order to bank
2. Seller’s bank (Remitting Bank) forwards to buyer’s bank (Collecting Bank)
3. Collecting Bank releases documents upon payment (D/P) or acceptance (D/A)
4. Payment remitted to seller

Key Risk

Under documentary collection, the buyer can refuse to collect goods-leaving the seller with unclaimed cargo at a foreign port plus demurrage costs. Unlike LC, there is no bank guarantee of payment.

D/P vs. D/A:

Aspect	D/P (Documents Against Payment)	D/A (Documents Against Acceptance)
Payment timing	Immediate	Deferred (30-90+ days)
Seller risk	Lower-payment before release	Higher-goods released before payment
Buyer cash flow	Strained	Preserved

Advantages over LC:

• Lower cost and complexity
• Doesn’t use buyer’s credit lines
• Faster process (minimal bank involvement)

Common Mistake

Treating D/P as equivalent to an LC because “the bank holds the documents.” Banks in documentary collection have no obligation to pay - they’re just couriers. If the buyer refuses to pay, you’re stuck with goods at a foreign port, mounting demurrage charges, and no recourse against the bank. For first-time buyers or large orders, insist on an LC.

Payment terms range from maximum seller security (cash in advance) to maximum buyer security (open account). Letters of Credit provide bank-guaranteed payment upon document presentation, enabling “trustless” transactions where parties do not need a prior relationship. About 70% of first LC presentations are rejected for discrepancies; always compare every LC requirement against your actual capability to produce compliant documents before shipping.

Letter of Credit (L/C)

A Letter of Credit is a bank guarantee of payment to the seller upon presentation of compliant documents. The issuing bank (buyer’s bank) commits to pay the beneficiary (seller) when document requirements are met.

Term	Meaning
L/C or LC	Letter of Credit (US/Asia terminology)
D/C	Documentary Credit (European terminology)
UCP 600	ICC rules governing LC transactions (current version since 2007)

Why Use LC? Enables “trustless” transactions-parties don’t need prior relationship because bank guarantees payment.

LC Workflow:

Step	Action
1. Agreement	Buyer and seller agree to LC payment
2. Application	Buyer requests LC from their bank (issuing bank)
3. Issuance	Issuing bank creates LC with terms and required documents
4. Notification	LC sent to seller’s bank (advising bank)
5. Confirmation	(Optional) Seller’s bank adds its guarantee
6. Shipment	Seller ships goods per LC terms
7. Presentation	Seller presents documents to bank
8. Examination	Bank verifies documents comply with LC
9. Payment	Issuing bank pays upon compliant presentation

Field Note

About 70% of first LC presentations are rejected for discrepancies - typos, date mismatches, missing documents, or descriptions that don’t match exactly. Before shipping, compare every LC requirement against your actual capability to produce compliant documents. Request amendments for unreasonable requirements upfront; fixing discrepancies after shipment costs money and delays payment.

Types of Letters of Credit

LC Type	Description	Use Case
At Sight	Payment upon compliant document presentation	Standard trade
Usance/Time	Payment deferred (30-180 days after presentation)	Buyer needs payment terms
Confirmed	Second bank (in seller’s country) adds its guarantee	Issuing bank/country risk concern
Transferable	Original beneficiary can transfer to secondary beneficiary	Intermediary/trader transactions
Back-to-Back	Use export LC to obtain import LC from own bank	Trading without capital
Standby (SBLC)	Guarantee-only drawn if applicant defaults	Performance bonds, bid bonds
Revolving	Auto-reinstates after each drawing	Repeat shipments

Confirmed LC

A confirming bank (usually in seller’s country) adds its guarantee to the LC. The seller receives payment even if the issuing bank or buyer fails.

Use when: Concerns about issuing bank creditworthiness or buyer’s country political/economic risk.

Transferable LC

Allows the original beneficiary to transfer all or part of the LC to secondary beneficiaries. Requires buyer’s explicit consent in the original LC.

Type	Description
Partial	Only portion transferred; original beneficiary retains balance
Full	Entire LC transferred to secondary beneficiary

Back-to-Back LC

The trader uses their “export LC” (from end-user) as security to obtain an “import LC” (to their supplier) from their own bank-without using own capital.

LC	Parties
Export LC (Main)	End-user → Trader
Import LC (Secondary)	Trader → Supplier

Conditions: Trader has solid bank relationship, export LC from reputable bank, supplier accepts LC, terms match except price.

Transferable vs. Back-to-Back

Transferable LC requires buyer consent and visibility. Back-to-back LC is confidential-end-user and supplier may not know about the intermediary arrangement.

Risk Summary

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