INTERNATIONAL TRADE LAW
Export Payment Methods: Prepayment to Open Account
Exporters get paid through one of five methods, and the choice is always a trade between how secure you are and how competitive your offer looks to the buyer. Ranked from safest for the seller to riskiest, they are cash in advance, letters of credit, documentary collections, open account, and consignment. The right one depends on how well you know the buyer, the country’s risk, and what your competitors are willing to offer.
There is a built-in tension here. The method that protects you most — demanding cash before you ship — is the least attractive to the buyer, who carries all the risk and ties up cash. The method buyers love — open account, pay later — leaves you exposed. Understanding the full ladder lets you pick a defensible middle and back it up with the right protections.
The five methods, safest to riskiest
| Method | Security for exporter | When it fits | Governing rules |
|---|---|---|---|
| Cash in advance | Highest | New or high-risk buyers; custom goods | Contract terms |
| Letter of credit | High | Sizable orders; buyer’s bank is creditworthy | ICC UCP 600 |
| Documentary collection | Medium | Established trade lanes; lower cost than an L/C | ICC URC 522 |
| Open account | Low | Trusted, repeat buyers; competitive markets | Contract terms |
| Consignment | Lowest | Strategic market entry; trusted distributors | Contract terms |
Cash in advance
The buyer pays before you ship. You carry no payment risk, but you are asking the buyer to trust you completely, which can cost you the sale in a competitive market. Common for first orders, customized goods, or buyers in high-risk countries.
Letter of credit (L/C)
A letter of credit is the buyer’s bank promising to pay you once you present documents that comply with the credit’s terms. It substitutes the bank’s creditworthiness for the buyer’s, which is why it is the workhorse of higher-value trade. Letters of credit are governed internationally by the ICC’s Uniform Customs and Practice for Documentary Credits (UCP 600). The catch is strict documentary compliance: a discrepancy as small as a misspelled name can justify a bank’s refusal to pay, so the documents must match the credit exactly.
Documentary collection (D/C)
Here the banks handle the documents but do not guarantee payment. Your bank forwards shipping documents to the buyer’s bank, to be released either against payment (D/P) or against acceptance (D/A) of a time draft. It is cheaper than a letter of credit and governed by the ICC’s Uniform Rules for Collections (URC 522), but the bank’s role is administrative — if the buyer refuses, you are left with goods in a foreign port.
Open account
You ship and invoice, and the buyer pays later — typically in 30, 60, or 90 days. This is what buyers prefer and what competitive markets increasingly demand, but it puts the financing and the risk on you. Smart exporters offset that exposure with export credit insurance or by factoring the receivable.
Consignment
Payment comes only after the buyer (usually a distributor) sells the goods. It is essentially open account with even more exposure, used to enter a market or support a trusted partner. It should always be paired with credit insurance and a clear written agreement on title and unsold inventory.
Matching the method to the deal
- Weigh buyer risk against competition. A buyer you trust in a stable country may justify open-account terms to win the business; an unknown buyer in a volatile market argues for cash in advance or a confirmed letter of credit.
- Separate payment from delivery. Your payment method is independent of your Incoterms rule — one governs when and how you get paid, the other governs cost, risk, and delivery of the goods. Set both deliberately.
- Protect the risky end. If you must offer open account or consignment to compete, do not go bare — insure the receivable so a single default does not become your loss.
- Get the documents right. With letters of credit and collections, payment turns on documents matching the terms exactly. Build a checklist and have a second set of eyes before presentation.
Frequently asked questions
What is the safest payment method for an exporter?
Cash in advance carries the least risk for the seller because payment is received before shipment. It is also the least attractive to buyers, so it is most common for new relationships, custom goods, or high-risk destinations.
How is a letter of credit different from a documentary collection?
A letter of credit is a bank’s guarantee to pay against compliant documents (governed by UCP 600). A documentary collection only has banks route the documents for payment or acceptance (governed by URC 522) — there is no bank guarantee, so it is cheaper but less secure.
Is open account too risky for exporters?
Not if it is managed. Open account is often necessary to compete, but the receivable should be protected — typically with export credit insurance or by factoring — so a buyer default does not fall entirely on you.
Does my Incoterm determine my payment terms?
No. Incoterms allocate cost, risk, and delivery of the goods; payment method and timing are set separately in the sales contract. Decide each one deliberately rather than assuming one follows the other.
The payment method you offer can win the order or sink the deal — and the wrong one quietly transfers risk onto you. Reidel Law Firm prepares flat-fee import/export compliance memos that match your payment terms, Incoterms, and credit protection to each market, with direct attorney access. Get a flat-fee import/export compliance memo →.
