INTERNATIONAL TRADE LAW
Import Payment Methods and Terms Explained
There are five main ways to pay for imported goods — cash in advance, letters of credit, documentary collections, open account, and consignment — and they trade off security against cost. The right choice depends on how much you trust the seller, how much working capital you can tie up, and where the leverage sits in the deal. A first-time buyer and a buyer with a ten-year supplier relationship should not be using the same payment terms.
The five payment methods, ranked by risk
Every method shifts risk between buyer and seller. The more secure a method is for the seller, the more risk it puts on you, the importer — and vice versa.
| Method | Who it favors | How it works |
|---|---|---|
| Cash in advance | Seller | You pay before the goods ship. Maximum risk to you. |
| Letter of credit | Balanced | A bank guarantees payment against compliant documents. |
| Documentary collection | Slightly favors seller | Banks exchange shipping documents for payment, without guaranteeing it. |
| Open account | Buyer | Goods ship first; you pay later (e.g., net 30/60/90). |
| Consignment | Buyer | You pay only after you sell the goods. |
As a new importer, you will often be pushed toward cash in advance or a letter of credit because the seller does not yet trust you. As the relationship matures, terms typically migrate toward open account.
Letters of credit and the UCP 600
A letter of credit (LC) brings banks in as intermediaries. Your bank (the issuing bank) promises to pay the seller once the seller presents documents that exactly match the LC’s terms — typically the bill of lading, commercial invoice, and any certificates the deal requires. The key idea is that banks deal in documents, not goods: if the paperwork conforms, the bank pays, even though it never inspects the merchandise.
Most commercial letters of credit are governed by the UCP 600 — the Uniform Customs and Practice for Documentary Credits, a set of rules published by the International Chamber of Commerce and in force since July 1, 2007. Because payment turns on documentary precision, the most common reason an LC fails is a discrepancy: a date, quantity, or description on a document that does not match the credit. Review the LC terms line by line before goods ship, because once a discrepancy appears, payment can stall until it is waived or fixed.
Documentary collections
A documentary collection is the lighter, cheaper cousin of the letter of credit. Banks still handle the documents — the seller’s bank forwards them to your bank, which releases them to you against payment (documents against payment) or against your written promise to pay later (documents against acceptance). The crucial difference: in a collection, no bank guarantees payment. The banks are couriers and agents, not guarantors. Collections cost less than an LC and suit relationships with moderate, established trust.
Open account and consignment
Open account is the buyer’s-favorite arrangement: the goods ship and clear, and you pay on agreed terms afterward. It is the norm in mature supplier relationships and competitive markets, but the seller carries the risk of non-payment. Consignment goes further still — you hold the goods and pay only as you sell them. Both put financing pressure on the seller, so you will generally only be offered them once you have a track record.
Incoterms set who pays for what — not how you pay
A frequent confusion: Incoterms and payment methods are two different things. The Incoterms 2020 rules — the current edition of the International Chamber of Commerce’s eleven three-letter terms (EXW, FOB, CIF, DDP, and the rest) — allocate who arranges and pays for shipping, insurance, and import clearance, and where risk of loss passes. They say nothing about how or when money changes hands. Your sales contract needs both: an Incoterm to divide the logistics and risk, and a payment method to govern the money. Pin down both in writing before the first shipment.
Frequently asked questions
Which payment method is safest for me as the importer? Open account and consignment are safest for you because you pay after receiving (or selling) the goods. They are hardest to obtain as a new buyer, since they shift risk to the seller.
What is the difference between a letter of credit and a documentary collection? A letter of credit is a bank guarantee of payment against conforming documents. A documentary collection uses banks only to exchange documents for payment — there is no guarantee if you fail to pay.
Are Incoterms a payment method? No. Incoterms 2020 allocate shipping, insurance, risk, and clearance responsibilities. Payment terms are negotiated separately. A complete contract specifies both.
Why did my supplier’s bank reject the letter of credit documents? Almost always a discrepancy — a mismatch between the documents presented and the LC’s exact terms. Banks pay on documentary compliance, so even small inconsistencies can hold up payment until resolved.
For broader context, see how to import goods for resale and our international trade law practice page.
Negotiating terms with an overseas supplier? Reidel Law Firm delivers a flat-fee Import/Export Compliance Memo that reviews your contract, Incoterms, and payment structure alongside your customs obligations — with direct attorney access. Get a flat-fee compliance memo →
