Export payment terms: the 5 methods, their risks and when to use each

Key takeaways

• There are five main methods of payment in export [1].
• Cash in advance gives no credit risk, but buyers like it least [2].
• A letter of credit gives a commitment from a bank [3].
• Open account and consignment have the highest risk for you [1].

Why do the exporter and the buyer disagree?

Each side wants the other side to take the risk. The US International Trade Administration (ITA) explains it this way [1]:

• The exporter wants the payment as soon as possible, before the goods go.
• The buyer wants the goods as soon as possible, and the payment as late as possible.

The payment term is the agreement between these two positions. A term that is too strict can lose the sale. A term that is too easy can lose the money.

What are the five methods?

The ITA describes each method in this order of risk [1]. The sections below give the main points.

When do you use cash in advance?

Cash in advance removes the credit risk [2]. The buyer pays by wire transfer, credit card or escrow before you ship. The ITA recommends it in these conditions [2]:

• the buyer is new or has a short history with you;
• you cannot check the credit of the buyer;
• the political or commercial risk in the market is high;
• your product is in high demand.

Buyers like this method least, because it affects their cash flow. Many exporters use a part payment in advance and the balance against documents. Our advance payment guide gives more detail.

When do you use a letter of credit?

A letter of credit is a commitment by the bank of the buyer to pay [3]. The bank pays when you ship the goods and present the required documents. It is useful when the credit of the buyer is not available, or the relation is new. It costs more in bank fees, and the documents must be exact. Our letter of credit guide gives the steps.

When do you use a documentary collection?

The banks exchange the shipping documents for payment [4]. The banks do not check the documents and do not guarantee the payment. The ITA recommends this method only for established relations in stable markets [4]. There are two types:

• D/P (documents against payment): the buyer pays at sight to get the documents.
• D/A (documents against acceptance): the buyer agrees to pay on a specified date.

If the buyer does not pay, you must find another buyer, pay to bring the goods back, or abandon them [4]. Our documentary collection guide gives more detail.

When do you use open account or consignment?

Open account means that you ship first and the buyer pays later, typically in 30, 60 or 90 days [1]. Buyers like it most. Use it only with a buyer that you know well. Export credit insurance can decrease the risk [1].

Consignment has the highest risk. The buyer pays only after it sells the goods, and you keep the title until then [1]. Use it only with a trusted distributor.

How do you choose for a new spice buyer?

1. Check the company of the buyer before you make an offer.
2. For the first order, ask for cash in advance or a letter of credit.
3. After good orders, offer a documentary collection.
4. Offer open account only to buyers with a good payment history.
5. Put the payment term in the quotation and the proforma invoice.

Next step. Before a buyer replies, the buyer usually checks your company online. Our free Buyer Check is a 1-page report on your Google listing, website and spec gaps. It gives the 3 most important fixes within 24 hours.