What payment terms should I offer a new overseas buyer?
Reevi team · Updated
For a buyer you have never shipped to, official guidance points to payment in advance or a letter of credit: great.gov.uk says to ask for payment in advance when a customer is new to you, and trade.gov says a letter of credit is useful when reliable credit information on the buyer is hard to obtain. If you accept the 60 days open account the buyer asks for, short-term export credit insurance covers 90 to 95 percent of a default (trade.gov), so part of any loss stays with you. Ask your bank and your national export credit insurer what they will offer on this shipment before you reply.
Reevi finds companies that already import cashew nuts into the United Kingdom and explains why each one fits; searching is free and needs no account.
Five methods, ranked by when the money moves
The five primary methods in the United States government's Trade Finance Guide (trade.gov), with great.gov.uk, from safest to riskiest for the exporter. trade.gov sums up the conflict: for exporters, "any sale is a gift until payment is received"; for importers, "any payment is a donation until the goods are received."
| Method | When the exporter is paid | Who carries the risk | How the buyer sees it |
|---|---|---|---|
| Cash in advance | Before the goods ship. The buyer pays the full amount or a significant part. | The buyer. It pays before ownership passes. | The least attractive option. The buyer fears the goods may not be sent. |
| Letter of credit (LC) | When you present documents that meet the terms of the LC. | The issuing bank commits to pay on behalf of the buyer. You carry the document risk: errors delay payment. | The buyer is protected too. It has no payment obligation until the goods are shipped as promised. |
| Documentary collection (D/C) | At sight when the buyer pays (documents against payment, D/P), or on a set date after the buyer signs acceptance (documents against acceptance, D/A). | Mostly you. The banks do not verify the documents and do not guarantee payment. | The buyer must pay, or sign a bill of exchange, at its bank before it can collect the documents. Bank charges are generally lower than for an LC. |
| Open account | Typically 30, 60 or 90 days after the goods are shipped and delivered. | You. The goods arrive before payment is due. One of the highest-risk options for the exporter. | One of the most advantageous options for the importer's cash flow and cost. |
| Consignment | Only after the foreign distributor sells the goods to the end customer. | You. You keep title, but payment is not guaranteed and the goods are abroad in the distributor's hands. | It pays only after it sells the goods. |
Your buyer asks for 60 days: what each method gives you
One method per need, with what it gives you and what it costs you in the deal
| What you need on this shipment | Method | What you get | What it costs you |
|---|---|---|---|
| No exposure to the buyer's credit | Cash in advance by wire transfer | Money in your account before the container leaves | The buyer may refuse it. great.gov.uk warns of lost goodwill and competitors with better terms. |
| A bank, not the buyer, promising to pay | Letter of credit, confirmed if the issuing bank or its country worries you | Payment when your documents comply with the LC | Bank fees, detailed documents, and delays if any document has an error |
| Give the buyer 60 days and protect most of the invoice if it defaults | Open account plus export credit insurance | Cover of 90 to 95 percent on short-term policies, for commercial and certain political risks | The policy cost, the uncovered share, and claims that can be denied if you break policy conditions |
| Keep control of the goods until the buyer pays, at a lower cost than an LC | Documentary collection, D/P | Shipping documents released only when the buyer pays | If the buyer does not pay, you find another buyer, pay for return transport or abandon the goods |
The last row has a practical side for cashew exporters. In import records filed in the United Kingdom, 86 companies appear as importers of cashew nuts (HS 080132), across 1,692 shipments. Import records filed in the United States show 293 companies and 9,922 shipments. The data provider does not state the period these records cover, so they show past trade, not current demand or any buyer's ability to pay. If a buyer refuses the goods at the port under D/P, the pages show how many companies in each market import the same product and which countries supply them. The company names appear in a Reevi search, not on the page (United Kingdom, United States).
Payment before shipment: full or part, by wire
trade.gov names wire transfers, credit cards and escrow services as cash-in-advance options. It ties credit cards to small consumer goods and e-commerce sales, and escrow to small export transactions. It describes a wire transfer as the most secure and preferred cash-in-advance option for exporters.
Advance payment does not have to be the full amount. In trade.gov's wording, the importer pays "the full or a significant amount" before shipment. trade.gov lists the cases where cash in advance fits. The importer is a new customer. Its creditworthiness is doubtful or unverifiable. The political and commercial risk in its country is high. Or your product is in heavy demand.
Letters of credit: paid against documents, not against goods
trade.gov defines an LC as a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided the terms of the LC are met, as verified through the presentation of all required documents. Those documents usually include an invoice, shipping and customs documents and quality assurance documents. Their information and wording must match your export invoice completely (great.gov.uk). The buyer pays its own bank to establish the LC.
ICC Academy (International Chamber of Commerce) says most documentary credits are issued subject to UCP 600, the ICC Uniform Customs and Practice for Documentary Credits, 2007 Revision. Under these rules a credit is irrevocable even if it does not say so. Once it is issued, it cannot be changed or cancelled without your agreement and the agreement of any confirming bank. UCP 600 no longer provides for revocable credits. ICC Academy says they still occasionally appear, with the revocability terms written into the credit, and such a credit can be cancelled at any time without your consent. Ask your bank to confirm that the credit you receive contains no such terms.
Confirmation means a second bank makes its own firm promise to pay you when your documents meet the LC terms, on top of the issuing bank's promise. (ICC Academy's term is a "definite undertaking" of the confirming bank, in addition to that of the issuing bank.) Sellers usually request it when they have concerns about the issuing bank, its country, or the risk that their documents are judged not to comply. It is usually written as a condition into the proforma invoice or sale contract.
Collections, open account and consignment: when you still carry buyer risk
In a documentary collection, your bank sends the shipping documents to the buyer's bank with instructions. The bank releases them either for payment (D/P) or for the buyer's signed acceptance of a bill of exchange (D/A). Under D/P, the documents stay with the bank until the buyer pays. Under D/A, the buyer gets the documents when it signs, so from then on you hold only its signed promise to pay on the due date. great.gov.uk notes that collections are used mainly for sea shipments. The banks do not verify the documents or guarantee payment. For this reason, trade.gov recommends collections only for established trade relationships in economically and politically stable markets.
On open account, the goods are delivered before payment is due. trade.gov notes that foreign buyers often press exporters for these terms. The 30, 60 or 90 days may run from the date of invoice, delivery or completion (great.gov.uk), so the contract must state exactly when, where and how you will be paid. The same lesson ties open account to a high level of trust with the customer. Consignment is a variation of open account: payment comes only after the distributor sells the goods, and trade.gov calls it very risky.
Export credit insurance, and where to ask in your country
trade.gov says export credit insurance covers commercial risks (insolvency of the buyer, bankruptcy, protracted default or slow payment) and certain political risks (war, terrorism, riots and revolution). Short-term cover is 90 to 95 percent. Short-term policies typically cover consumer goods and materials up to 180 days and bulk commodities up to 360 days, so a 60-day term falls inside both. Coverage is usually below 100 percent, and you carry the uncovered portion. trade.gov treats cover as a proactive purchase: obtain it before a customer becomes a problem.
For exporters in India, the Berne Union member directory lists ECGC Limited. If you export from another country, search the same directory for a member based in your own country.
Before you reply to the buyer: four questions in order
- 1
Have you checked this buyer?
great.gov.uk lists these checks: - a credit report from Experian, Equifax or TransUnion - a bank reference and trade references from the buyer - online research - the local chamber of commerce or trade association Reevi's free trust check shows whether the company is real and active. It is not a credit report, so the checks above still apply. The full method is in how to verify a foreign buyer.
- 2
Which loss can you carry on this shipment?
Each method leaves you a different loss: - Open account with short-term insurance: the uncovered share of the invoice (trade.gov: short-term cover is 90 to 95 percent), plus any claim the insurer denies. - D/P: return freight, or a sale to another buyer at the port. - D/A: only the buyer's promise, after the documents are released. - LC: the cost of document errors. Put a money figure on each one for this invoice.
- 3
What will the buyer accept besides 60 days open account?
Ask whether it would accept a smaller first order paid in advance, a part payment in advance with the balance later, an LC, or D/P. great.gov.uk suggests being paid in advance for the first few invoices to build trust.
- 4
What do your bank and your insurer say?
Book a meeting with your bank's trade finance desk this week. Contact your country's export credit insurer from the section above, or in Vietnam raise insurance in the same bank meeting. Take the questions below.
For the bank: What type and size of export transaction suits a letter of credit, and what does it cost us? Do you require collateral or a credit line from us for an LC or a documentary collection? Should we ask for the LC to be confirmed, given this buyer's bank and country? How is a documentary collection different from a letter of credit for this shipment? How are disputes between importer and exporter resolved? For the insurer: Can you cover this buyer in the United Kingdom (or the United States) on 60 days open account? What does the policy cost for this buyer and this invoice value? What share of the loss is covered, and is there any way to reduce the share we keep? Does the policy pay if the buyer refuses the goods at the port? What must we do after shipment to keep a claim valid?
Questions exporters ask
Is a letter of credit the same as a documentary credit?
Yes. ICC Academy says the two terms mean the same thing. ICC rules, including UCP 600, use the term documentary credit.
Who prepares and checks the documents for a letter of credit?
trade.gov says trained professionals should prepare the documents, and a freight forwarder may help. After shipment you submit them to your bank. Your bank checks them against the LC terms before it sends them to the buyer's bank. You must correct and resubmit any document with an error or discrepancy, which delays payment.
How long can a bank take to examine LC documents?
ICC Academy says UCP 600 limits the examination period to a maximum of five banking days after the day you present the documents.
What is silent confirmation of an LC?
ICC Academy describes it as a private arrangement between a bank and the seller. The advising bank adds a conditional guarantee of payment without the issuing bank knowing. UCP does not cover it, and it costs more than normal confirmation. Ask your bank whether it offers it.