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Import / Export Payment Terms and Comparison


Common payment terms

Open account:
You ship, then forward your shipping documents directly to your buyer and await payment.

C.A.D. (Cash against documents):
You ship then forward your shipping documents to an agent named by your buyer (may be a bank) who pays you when authorized by your buyer.

Sight draft or time draft (Documentary collections):
You ship, then use your bank as an agent to forward shipping documents to your buyer through his bank. The buyer's bank must obtain payment/promise of payment from the buyer before releasing shipping documents.

Advised letter of credit:
Before you ship you receive your buyer's bank's written conditional obligation to pay you, usually upon presentation of conforming shipping documents to the buyer's bank after shipment.

Confirmed letter of credit:
Before you ship you receive your buyer's bank's written conditional obligation to pay you, which is further "guaranteed" by a U.S. bank acceptable to you. To be paid you usually present your conforming shipping documents to the U.S. confirming bank.

Cash in advance:
You receive cash from the buyer before shipping.


Methods of payment

Methods of payment


Comparison of various methods of payment

Method Goods Available To Buyer Usual Time Of Payment Risk To Exporter Risk To Importer
Cash In Advance After Payment Before Shipment Very Low Maximum-Relies on exporter to ship goods as ordered
Letter of Credit
Unconfirmed (Advised)
After Payment When documents are available at shipment Very Low Assured of quantity and also quality at shipment if inspection report is required
Documentary Collection Sight Draft Documents against Payment After Payment On presentation of draft to importer If draft unpaid, goods must be returned or disposed of, usually at loss Assured of quantity, also quality, if goods are inspected before shipment
Documentary Collection Time Draft Documents against Acceptance Before payment On maturity of draft Relies on importer to pay draft Minimal!Can check shipment for quantity and quality before payment
Consignment Before payment, exporter retains title until goods are sold or used After use; inventory and warehousing cost to exporter Substantial risk unless through foreign branch or subsidiary Very Low
Open Account Before payment As agreed Relies on importer to pay account as agreed!complete risk Very Low


Letters of credit: the basics

A documentary credit is a (conditional) bank undertaking of payment. It is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request, and on the instructions of the buyer (applicant) to pay at sight or at a determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents or other conditions. The issuing bank is putting out its credit and good name for the sake of the buyer.

Because the documentary credit is a conditional undertaking, payment is made on behalf of the buyer against documents, which may represent the goods and give the buyer rights to them.

Because the documentary credit is a bank undertaking, the seller can look to the bank for payment, instead of relying upon the ability or willingness of the buyer to pay.

However, because the undertaking is conditional, the seller only has the right to demand payment if he meets all the requirements of the credit. It is, therefore, unwise for the seller to proceed with shipment until he is aware of these requirements and is satisfied he can meet them.

Documentary credits therefore:

  • Are an arrangement by banks for settling international commercial transactions.
  • Provide a form of security for the parties involved.
  • Ensure payment, provided that the terms and conditions of the letter of credit have been fulfilled.
  • Mean that payment by such means is based on documents only, and not on merchandise or services involved.


Types of letters of credit

Merchandise, Commercial, Trade:
The majority of LCs issued are in payment for goods in shipment or current services performed. Payment is normally made against documents for goods shipped. (Article 1&2, UCP 500)

Normally, this type of LC functions like a guarantee. This type of credit can be drawn against only upon performance of service or financial obligation default. It is a definite undertaking of the issuing bank. Similar to commercial LCs, standby's are governed by the International Standby Practices 1998. (ISP98)

A revocable letter of credit may be amended or canceled by the issuing bank at any moment and without prior notice to the beneficiary. (Article 6 & 8, UCP 500)

Bears only the obligation of the issuing bank. The beneficiary should look to the credit worthiness of only the issuing bank, and not to any intermediary. (Article 9, UCP 500)

Is a credit in which a second obligation is added to the letter of credit by another bank. (Article 9, UCP 500)

Payment is at sight, which means that the drafts and documents are honored, if in order, by making payment without delay.

Time, Usance:
The draft honored by accepting it for payment at a future date. Payment is delayed until the maturity of the draft.

Transferable credit:
Can be transferred by the original beneficiary to one or more other parties. It is normally used when the first beneficiary does not supply the merchandise himself, but is a middleman and wants to transfer all or part of his rights to the actual supplier. (Article 48, UCP 500)


Guidelines for the beneficiary when reviewing the L/C

Be Sure to Verify:

  1. Correct name and address
  2. Sufficient credit amount
  3. Documents required are obtainable and according to terms of sale
  4. Points of shipment and destination are correct
  5. Insurance coverage requirements are obtainable and according to terms of sale
  6. Shipping date allows sufficient time to dispatch goods
  7. Expiration date allows sufficient time for presentation of draft and documents
  8. Description of goods is correct and simply stated 


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