The core tension
Every cross-border sale has the same problem. The seller would prefer to be paid before the goods leave, because once they are shipped it has limited control over them. The buyer would prefer to pay after the goods arrive and are checked, because once the money is sent it has limited control over what it receives. Payment terms are the agreed compromise between those two positions.
The right choice depends on how well the parties know each other, the size of the order, the countries involved, and what banks and financing are available. This article describes the main arrangements in general terms. It is not financial or legal advice, and fees, rules and availability vary by bank and country.
The main options
Payment in advance
The buyer pays before the seller ships, in full or in part. It is the safest arrangement for the seller and the riskiest for the buyer, who must trust that the goods will be sent and match the order. It is common for first orders, small purchases, custom-made goods and sales to buyers the seller does not know. Partial advance payments, such as a deposit with the balance due before shipment or on delivery, are a frequent middle ground.
Open account
The seller ships the goods and sends an invoice, with payment due after a set period such as 30 or 60 days. The risk sits mostly with the seller, who has delivered the goods and is relying on the buyer’s promise to pay. Open account is usual between established partners with a track record, and it is often what buyers prefer, because it gives them time to receive and sell the goods before they pay. Sellers sometimes protect themselves with trade credit insurance or sell their receivables to a financing company. Neither is risk-free.
Documentary collection
The seller ships the goods and gives the shipping documents to its bank, which passes them to the buyer’s bank. The buyer’s bank releases the documents, which the buyer needs to take possession of the goods, only when the buyer either pays (“documents against payment”) or accepts a promise to pay later (“documents against acceptance”). It is cheaper than a letter of credit and gives the seller more control than open account, but the banks do not guarantee payment. If the buyer refuses to collect the documents, the seller is left with goods in a foreign port and a decision about what to do with them.
Letter of credit
A letter of credit is a bank’s undertaking, issued at the buyer’s request, to pay the seller if the seller presents documents that comply exactly with the terms of the credit. The bank deals in documents, not in the goods themselves. Letters of credit are often governed by standard rules published by the International Chamber of Commerce.
Key features:
- The seller gains the payment commitment of a bank, not just the buyer.
- A seller worried about the issuing bank or the country can ask another bank to “confirm” the credit, adding its own commitment, usually for a fee.
- The buyer gains some assurance that payment will be made only when the specified documents are presented.
- The process is more complex and costly than other methods, and a discrepancy of small detail between documents and credit terms can delay or block payment. This is why the accuracy described in the article on shipping documents matters so much.
Other arrangements
Other tools include bank guarantees and standby letters of credit (which act as a fallback if the buyer does not pay), trade finance loans against shipments or invoices, and consignment, where the seller keeps ownership until the buyer sells the goods and is the riskiest option for the seller. Digital payment platforms and bank transfers are the tools by which money moves, but they are separate from the question of terms.
Comparing the options
| Method | Seller’s risk | Buyer’s risk | Typical cost and effort |
|---|---|---|---|
| Advance payment | Lowest | Highest | Low |
| Letter of credit | Low (if bank is sound) | Low to moderate | High |
| Documentary collection | Moderate | Moderate | Moderate |
| Open account | Highest | Lowest | Low |
This is a rough guide, and actual risk depends on the parties and the countries.
Linking payment to other terms
Payment terms work alongside other contract terms. The trade term chosen, covered in the article on Incoterms rules, decides when risk passes, which interacts with when payment is due. If goods are lost in transit after risk has passed to the buyer, the buyer may still owe payment, so insurance matters. Timing also matters: payment tied to documents depends on when shipping documents are issued, and long lead times can leave a seller waiting for months for payment under open account.
Other risks to consider
- Currency risk. If the invoice is in a currency different from the one in which the seller incurs costs, exchange-rate moves can change the real margin. Contracts can specify the currency, and some businesses use hedging tools.
- Country and transfer risk. Some countries restrict the transfer of foreign currency or delay payments.
- Fraud. Fake invoices, altered bank details and impersonation of suppliers are well-known problems. Confirming payment details through a separate, trusted channel before sending money is a sensible precaution.
- Disputes. Quality or delivery disagreements can lead to withheld payments. Clear specifications, inspection arrangements and agreed procedures reduce this.
- Cash flow. A long wait for payment can strain a small seller, which is one reason companies compare terms along with their supplier selection and customer choices.
Practical guidance
A cautious pattern many businesses follow is to start with tighter terms for a new relationship, such as advance payment or a letter of credit, and to move to open account gradually as trust builds. It is helpful to check a new partner’s reputation, ask for references, and use banks’ trade services for advice. Written contracts that state the amount, currency, due date and consequences of late payment are preferable to informal understandings. Where large sums are involved, a trade finance specialist or lawyer can review the terms before signing.