The payment term decides who carries the risk: the seller of not being paid, or the buyer of not receiving the goods. Most failed negotiations are really disagreements about this one clause.
The options, from safest for the seller to safest for the buyer
| Term | How it works | Seller risk | Buyer risk | Typical use |
|---|---|---|---|---|
| Cash in advance (TT) | Buyer pays before shipment by bank transfer | None | High | Small lots, trusted sellers, trial orders |
| Documentary letter of credit (LC, DLC) | Buyer's bank promises to pay when the seller presents documents that comply with the credit | Low (very low if confirmed) | Low: pays only against documents | Most bulk commodity trade with new partners |
| Documentary collection (CAD, D/P, D/A) | Banks exchange documents for payment (D/P) or acceptance of a bill (D/A), with no bank guarantee | Medium | Low | Established relationships |
| Open account | Seller ships and invoices; buyer pays later | High | None | Long-term partners, often with credit insurance |
| SBLC or bank guarantee backing open account | Buyer pays by transfer; the SBLC pays only if the buyer does not | Low | Low | Repeat contracts, programmes over many months |
Letters of credit
A documentary credit is governed by UCP 600. The bank deals in documents, not goods: it pays if the documents comply with the credit's terms, even if the cargo has a problem, and refuses if a document is wrong, even if the cargo is perfect. That is why the LC text must be agreed before it is issued.
- Sight LC: payment as soon as compliant documents are presented.
- Deferred payment or usance LC: payment at a later date, for example 90 days after B/L, giving the buyer credit.
- Confirmed LC: a second bank, usually in the seller's country, adds its own promise to pay. Essential when the issuing bank or country is a risk.
- Transferable LC: lets a middleman transfer part of the credit to the actual supplier. Must be expressly stated as transferable.
- Back-to-back LC: a trader uses one LC as support to open a second LC to its supplier.
- Revolving LC: reinstates after each shipment for a programme of deliveries.
The SWIFT message MT700 issues a documentary credit. MT710/720 advise or transfer it.
Standby letters of credit and guarantees
An SBLC (under ISP98 or UCP 600) or a demand guarantee (under URDG 758) is a promise to pay if the applicant fails. It is a safety net, not the normal way to pay. Banks issue them by MT760. A seller's performance bond is a guarantee in the buyer's favour that the seller will deliver.
What the seller and buyer should agree
- Instrument type and the rules it is subject to
- Issuing bank and confirming bank, and who pays which charges
- Amount, tolerance (for example ±10%) and currency
- Expiry date and place, latest shipment date, presentation period
- Exact list of documents, with issuer and wording
- Partial shipments and transhipment allowed or not
- Draft LC text exchanged and approved before issue
TradeScout24 Trade Desk · Sources: ICC UCP 600, ISP98, URDG 758 · General information, not banking advice · Last reviewed 25 Oct 2026