Payment terms in international trade: T/T, collections, L/C

The risk ladder

Prepayment and T/T

T/T (telegraphic transfer) is an ordinary international bank transfer, usually via SWIFT. It is a way to move money, not a form of security. The risk depends on when you pay.

Common variants:

• 100% advance with the order: typical for small orders and new relationships where the seller does not know the buyer.
• 30/70: 30% with the order, 70% against a scan of the bill of lading, before the originals are released. The buyer risks the deposit; the seller risks shipping before the balance arrives, but keeps control of the original documents.
• Payment on arrival or after inspection: good for the buyer, requires the seller's trust.

With any transfer, the biggest threat is a fraudulent change of bank details. Always confirm a new account through a separate channel. See our guide to B2B trade fraud.

Open account

The seller ships and sends the documents directly to the buyer, who pays on the agreed date, for example 30 or 60 days from the bill of lading date. This is standard in established relationships and within the EU. The seller can limit the risk with trade credit insurance or factoring, which are separate products arranged with an insurer or bank.

Documentary collection (URC 522)

In a collection, the seller hands the documents to its bank, which sends them to the buyer's bank with instructions. Banks follow the ICC Uniform Rules for Collections (URC 522). Two main variants:

• D/P (documents against payment): the bank releases documents only when the buyer pays.
• D/A (documents against acceptance): the bank releases documents when the buyer accepts a bill of exchange payable at a future date.

Banks do not guarantee payment under a collection. If the buyer does not take up the documents, the seller has goods sitting at the destination port and must resell them, ship them back or pay storage. D/P works best with an order bill of lading, because the goods cannot be collected without it. With a sea waybill or road transport, control through documents is much weaker.

Documentary letter of credit (UCP 600)

A letter of credit is an undertaking by the buyer's bank (the issuing bank) to pay the seller if the seller presents documents that comply with the credit's terms. Most credits are subject to the ICC's UCP 600, in use since 1 July 2007.

Key points:

• banks deal with documents, not goods; the credit is independent of the sales contract;
• under UCP 600 a credit is irrevocable even if it does not say so;
• confirmed credit: a second bank, usually in the seller's country, adds its own undertaking to pay, protecting the seller against the issuing bank's risk and country risk;
• where "about" precedes the amount, quantity or unit price, UCP 600 allows a 10% tolerance either way; without such wording, a 5% quantity tolerance applies to goods not counted in units, provided the total drawing does not exceed the credit amount.

The most common problem is discrepancies: a typo in a name, a wrong date, a missing signature, a different port. The bank can refuse payment for a discrepancy. Sellers should review the draft credit before it is issued and reject conditions they cannot meet.

Letters of credit cost money: issuing, confirmation, document examination and amendment fees. On smaller deals the cost can outweigh the benefit.

Which terms to choose

• New relationship, small value: part prepayment with the balance against copy documents, plus a trial order.
• New relationship, large value, higher-risk country: a letter of credit, ideally confirmed.
• Proven relationship, medium value: D/P collection or part prepayment.
• Long-standing, stable buyer: open account, possibly with credit insurance.

For Philippine exporters selling to new EU buyers, a confirmed letter of credit or a meaningful deposit is a reasonable ask on a first large shipment; most EU buyers expect to move towards open account as the relationship matures.

Payment terms are part of the price. Longer terms for the buyer mean the seller is financing the deal, so include the cost of money when comparing offers. Our guide to landed cost shows how.

Payment terms, Incoterms and documents

Payment terms must fit the Incoterms rule and the documents. If the credit calls for an on-board bill of lading but the contract is FCA, include the Incoterms 2020 on-board bill of lading option in the contract. If you require an insurance certificate, the rule should put insurance on the seller (CIF, CIP) or you must agree it separately. See our overview of shipping documents.

Payments and Hiram

Hiram never holds money and does not sit in the payment flow: the buyer pays the seller directly on the terms agreed in the deal. Payment terms are part of each quote and negotiation, so they are recorded with the other terms.

Checklist

• Method matched to trust level and deal size.
• Payment timing tied to a document or event (order, B/L, arrival).
• Currency and who pays bank charges (for example SHA or OUR).
• For a letter of credit: draft reviewed by the seller before issue.
• Bank account confirmed through a separate channel.
• Financing cost included when comparing offers.

To agree payment terms in a structured way, see how Hiram works.

Sources

• ICC, UCP 600 - Uniform Customs and Practice for Documentary Credits: https://2go.iccwbo.org/ucp-600-uniform-rules-for-documentary-credits-config-1+book_version-Book/ (opens in a new tab)
• ICC, URC 522 - Uniform Rules for Collections: https://2go.iccwbo.org/urc-522-uniform-rules-for-collections-config-1+book_version-Book/ (opens in a new tab)
• ICC Academy, Documentary credits: rules, guidelines & terminology: https://academy.iccwbo.org/international-trade/article/documentary-credits-rules-guidelines-terminology/ (opens in a new tab)
• ICC, Incoterms® 2020: https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/ (opens in a new tab)