Payment Terms of International Trade

Payment Terms of International Trade.  How to choose in international trade? Exports are inseparable from receipts and payments. What are the common international settlement methods? What are the risks of different payment methods? What factors should be considered when choosing a payment method?

Payment Terms of International Trade

Payment method


There are three main types of payment for foreign trade exports, L/C (Letter of Credit), T/T (Telegraphic Transfer), and D/P (Document against Payment). Among them, L/C is used the most, T/T is the second, and D/P is less.

L/C (Letter of Credit)

A letter of credit refers to a written guarantee document issued by the issuing bank to the beneficiary at the request of the applicant (the buyer) and in accordance with its instructions, which contains a certain amount of payment and meets the required documents within a certain period of time.

Letter of credit is currently the most commonly used payment method in international trade. The letter of credit can be said to be an S/C guaranteed by the bank for payment. As long as you follow the terms of the contract and provide the corresponding documents to the bank, you must pay you. In theory, the letter of credit is a very safe payment method. But in actual operation, sometimes the letter of credit is not so insurable, and there may be soft terms that are difficult for you to achieve, causing artificial discrepancies.


T/T (Telegraphic Transfer)

Telegraphic transfer (T/T) is a remittance method in which the remitter instructs the remittance bank to pay a certain amount to the beneficiary of the remittance bank by telegram or telex. There are two types: front T/T and back T/T.

The first T/T is after the contract is signed, a part of the deposit is paid first, usually 30%, the production is completed, the payment is notified, the balance is paid, and then shipped, and a full set of documents are delivered. However, the former T/T is relatively rare, and it appears more in European and American countries.


After that, T/T will receive the deposit, arrange production and shipment, and the customer will pay the balance after receiving the copy of the document; the seller will send a full set of documents after receiving the balance.

T/T and L/C comparison

1. T/T is simpler and more flexible than L/C.

or example, the delivery time is tight, packaging changes, etc., as long as the customer agrees, it doesn’t matter. If it is a letter of credit, it is quite troublesome. It is necessary to modify the letter of credit, otherwise it will cause discrepancy, and the customer can refuse to pay.

2. Another feature of T/T is that the cost is lower than that of L/C.

Bank charges are relatively small, generally tens of dollars. The letter of credit can sometimes be as much as several hundred dollars. Therefore, some factories offer T/T prices lower than L/C. However, generally speaking, if the documents of the letter of credit are well done, it is more reliable than the T/T, and the collection is guaranteed by the bank. With the letter of credit, you can go to the bank to package the loan, and the funding pressure is small. However, countries with poor bank credit or strict foreign exchange controls have a high risk of letter of credit, such as India.

3. T/T and L/C have their own advantages and disadvantages.

If T/T and L/C are combined, it will be safer. 30% T/T, The balance L/C.


Document against payment D/P


Documents against payment is a method of document delivery under documentary collection. It points out that the exporter’s documents are based on the payment of the importer, that is, the importer can receive the documents from the bank only after payment. Divided into D/P on demand and D/A on acceptance.

D/P Document against Payment indicates that the exporter issues a draft at sight, and the collecting bank prompts the importer that the importer must pay after seeing the invoice. When the payment is paid, the importer obtains the shipping document.

D/A Documents against Acceptance is a method in which the exporter (or collecting bank) delivers the documents to the importer on the condition of acceptance under the documentary collection method. This settlement method is more risky for exporters.

D/P payment and D/A payment methods are used less frequently. Mainly because these two payment methods belong to commercial credit, that is, whether the export company can receive the payment depends entirely on the credit of the importer. Whether the importer can receive the goods on time, quality and quantity also depends on the credit of the exporter. Therefore, these two payment methods are mostly used by importers and exporters with good reputation.


Risks of different Payment

100% T/T advance

100% models arrive at production. Note that this is payment to production, and the method is not payment to delivery. This payment method means that the entire payment is received before production has started. Of course, it is a payment method with zero risk for the exporter, but the same method is the most risky for the importer. Generally, this payment method is only used for sample orders or small orders.


T/T deposit + T/T balance payment before shipment

This payment method is also very safe. And the higher the deposit ratio, the higher the safety factor. Of course, there are some very extreme situations. The customer abandons the product after paying the deposit, or goes bankrupt. This probability is very, very small.

As long as there is no shipment, if the deposit is received and the customer abandons the product, it can be resold to other customers or reduced in price. There are still many solutions.


T/T deposit + final payment at sight letter of credit


Generally speaking, it is 30% T/T and 70% balance letter of credit. Of course, the higher the T/T ratio, the better at this time. In fact, this payment method is almost as secure as the second payment method. It is also a very safe payment method.

The difference is that with this payment method, the bill of lading can only be delivered after the shipment has been shipped. The biggest risk of L/C collection is that the customer refuses to pay after the discrepancy. After receiving the T/T deposit, it can be guaranteed that there will be immediate discrepancies, and the customer will basically accept the discrepancy payment redemption order, because he has already paid so much deposit, it is impossible to avoid the deposit or deposit for a little discrepancy in the document Up. So this payment method is also very, very safe.

It should be noted here that the T/T deposit is collected first, and the final payment is an irrevocable letter of credit at sight, which is a very safe payment method. But it must be noted that the deposit is collected by T/T first, and the balance is the letter of credit.


The above three payment methods can be said to be 99.99% safe. If you have strict risk control, then the above three methods are definitely the first choice, basically there will be no bad debts and the risk of not receiving payment.


Part of the deposit, part of the balance, see a copy of the bill of lading

The most common ratio is 30% T/T, and 70% of the balance is on the copy of the bill of lading. In actual operation, there will be some changes. For example, for some old customers with good payment methods, you can also pay 20% T/T and 80% of the balance on the bill of lading.

The security level of this payment method is 99% and it is also very safe.


Risks  for T/T deposit, the balance against the copy of  B/L

1. Try to use To Order instead of the actual consignee name as the bill of lading consignee. To Order means that according to the shipper’s instructions, such a bill of lading can only be picked up after the shipper’s endorsement, which increases the control of the goods. But there is a drawback of this is that To Order indicates that the bill of lading cannot be telex released. If you encounter a customer who needs a telex release of the bill of lading, you must change the consignee to the customer company for the telex release.

2. Increase the deposit ratio as much as possible. This effect is to reduce the risk of customers abandoning goods when the economy of the importing country or the customer’s operating conditions change. Similarly, the exchange rate is unlikely to fall by 50% in just one or two months. On the other hand, the advantage of over-collecting the deposit is that in case the customer really abandons the goods, the deposit you receive can cover the cost of pulling the goods back and handling the resale, so that you can take the initiative in handling the abandonment.

3. It is clear that the final payment shall be paid within 5 or 10 days after seeing the bill of lading, which is a time limit for the customer to pay. Because some customers like to delay the payment until the goods arrive at the port due to the consideration of capital turnover. It was clear that the balance payment was made within 5 or 10 days after seeing the bill of lading, and he was given a certain time limit. In this way, if customers are in urgent need of delay, the collection of payment is justified. If it is not clear, some customers will think that I just pay before I arrive in Hong Kong. Even some customers who procrastinated maliciously did not pay if they had money. Because deferred payment will bring us exchange rate losses, we can claim compensation on this basis.

4. Pay close attention to the international situation and strictly control the payment method for countries at risk. For example, some exchange rates have fallen sharply, or the political environment is turbulent, there is a risk of war, and so on. When encountering customers in such countries, they must strictly examine the risks of payment methods before accepting orders.


Factors to consider when choosing a payment method


Due to the different characteristics of various payment methods, the following factors should be considered when choosing a suitable payment method.


1.Customer credit rating

If the customer’s credit rating is average or the two parties are trading for the first time, the L/C method should be used.


2. Different goods supply and demand conditions

If it is a best-selling product, the seller can choose a payment method that is beneficial to him, such as requiring L/C for settlement, or even asking the buyer to pay in advance.


3. The selected trade terms and the amount of the contract

Different trade terms have different responsibilities and risk sharing between buyers and sellers. Therefore, appropriate payment methods should be selected according to different trade terms. In addition, if the contract amount is not large, you can consider choosing a faster, low-cost T/T method or a clean collection method.


Whether the choice of international trade payment  is appropriate will directly lead to whether the exporter can receive the payment safely and quickly. When choosing, we must consider not only our own risks, but also the cost of the other party, in an effort to achieve a win-win situation.

Therefore, it should be decided according to the other party’s credit rating, the supply and demand status of the goods, the level of the contract amount, the mode and type of transportation, and the level of financial settlement costs. At the same time, flexibly use combined and comprehensive payment methods for international trade settlement to diversify settlement risks.