Methods of Payment in International Trade: The 5 Types, With Examples and How to Choose

Last updated: October 2026

There are five core methods of payment in international trade: cash-in-advance, letter of credit, documentary collection, open account and consignment. They sit on one risk spectrum, from safest for the exporter (cash-in-advance) to safest for the importer (consignment).

Also called trade payment terms or payment modes, they apply whether you export or import. Some guides list six or seven by counting the instruments that move the money, such as wire transfer and bank draft, which this guide separates out.

The more secure a method is for the exporter, the more risk it pushes onto the buyer, and the harder it can be to win the deal. The skill is matching the method to how well the two sides know each other.

There are five core methods. Lists of four leave out consignment, the least common; lists of six or seven add the instruments that move the money, wire transfer and bank draft, as if they were separate methods. The five are the terms you negotiate; the instruments are a separate choice about cost and speed.

A buyer who says "we will pay by TT" has named the instrument, not the deal. The method is still cash-in-advance if the TT lands before you ship, or open account if it lands 60 days after.

Wire transfer and bank draft: how the money actually moves

A wire transfer, also called a telegraphic transfer (TT), is the electronic bank transfer behind most trade payments today, sent between banks over the SWIFT network. It usually arrives within a few working days, and each extra bank between the buyer's bank and yours adds time and charges.

A bank draft is a paper cheque the buyer buys from their own bank and posts to the exporter. It is slow, because it travels by post and then has to clear, can be lost or delayed in transit, and carries the same exchange-rate cost as a wire, so most exporters ask for a wire instead.

Cash-in-advance

• Exporter risk: None. The money is in your account before any goods leave.
• Importer risk: Highest. Their cash is committed before anything has shipped.
• Best used for: First orders, custom or made-to-order goods, hard-to-verify markets.

How it works

1. You send the buyer a proforma invoice with the amount due and your bank details (bank name, SWIFT code, account number).
2. The buyer pays by wire transfer before you ship; card or escrow is used for small orders.
3. Your bank credits the money and issues the FIRA. Only then do you ship.
4. You send the commercial invoice and transport document (bill of lading or air waybill) straight to the buyer.

Pros: it removes your credit risk entirely, since you hold the money before any goods leave. That is why it is the default for a first deal with a buyer you cannot yet verify.

Cons: the cost is commercial, not financial. A buyer with other options will rarely wire the full amount to a supplier they have never used, so insisting on 100% upfront can quietly lose you the order. A part-advance split is the usual fix.

Example: a Surat textile exporter lands a first order from a new US boutique and takes 30% on order to cover the fabric, then 70% against a scanned bill of lading before the container sails. The exporter is never out of pocket, and the buyer pays the balance only once they can see the goods have shipped.

Letter of credit (LC)

• Exporter risk: Low, as long as your documents match the credit exactly.
• Importer risk: Low, their bank pays only against compliant documents, not on trust.
• Best used for: Large, high-value shipments and newer, higher-risk buyers.

How it works

1. You and the buyer agree in the contract that payment will be by letter of credit, and which documents and dates it will ask for.
2. The buyer (the applicant) asks its bank to issue the LC. The issuing bank sends it through a bank in India, which advises it to you and, if you asked for a confirmed LC, adds its own promise to pay.
3. Check every term the day it arrives: amount, currency, latest shipment date, expiry date and each document required. Ask for an amendment before you ship if you cannot meet one.
4. Ship, then present the documents to the bank. Under UCP 600 this must be within 21 calendar days after shipment, unless the LC sets a shorter period, and before the LC expires.
5. Each bank has up to five banking days to check the documents. If they comply, the issuing bank (or the confirming bank) must pay, at sight or on the agreed later date.

Pros: an LC replaces the buyer's credit risk with a bank's, and a confirmed LC adds a second bank in India that also guarantees payment, so you are covered even when the issuing bank or its country is shaky.

Cons: the protection is documentary, not automatic. Every bank in the chain charges a fee, and confirmation costs more for riskier countries. The ICC estimates that 65% to 80% of documents presented under letters of credit are refused on first presentation because of discrepancies, and each discrepancy delays payment and gives the buyer a chance to renegotiate, so the paperwork has to be exact.

Example: a Pune auto-parts firm wins a USD 250,000 order from a first-time buyer in a higher-risk market and asks for a confirmed irrevocable LC under UCP 600, so a bank in India guarantees payment the moment clean documents are presented. It builds in a few extra days to have the documents checked before they reach the bank.

Documentary collection (D/C)

• Exporter risk: Moderate. The banks move the documents but do not guarantee the buyer pays.
• Importer risk: Moderate. Under D/A they commit before they can inspect the cargo.
• Best used for: Established partners in reasonably stable markets, without LC cost.

How it works

1. You ship, then hand the shipping documents and a bill of exchange to your bank (the remitting bank) with a collection instruction saying D/P or D/A.
2. Your bank sends them to the buyer's bank (the collecting or presenting bank).
3. The buyer's bank releases the documents only as instructed: when the buyer pays (D/P) or when the buyer signs the bill promising to pay on a set date (D/A).
4. The buyer's bank sends the money to your bank. The banks follow the instruction but do not guarantee payment; most collections run under the ICC's URC 522 rules.

Pros: it is far cheaper and simpler than an LC because the banks only handle the documents. Under documents against payment (D/P) the buyer must pay to release the documents that clear the cargo, so your exposure stays limited.

Cons: the banks do not guarantee payment. Under documents against acceptance (D/A) the buyer takes the goods on a promise to pay later, and if they stall you are chasing an overdue account with the shipment already gone.

Example: a Chennai chemicals exporter with a two-year record selling to a European distributor uses D/P, so the distributor cannot collect the shipment from the port until they have paid at their bank. That gives LC-style control on the cargo at a fraction of the cost.

Open account

• Exporter risk: Highest. You have shipped and now wait 30 to 90 days, with no bank behind the payment.
• Importer risk: Lowest. The goods arrive, and are often sold, before anything is due.
• Best used for: Trusted, long-term buyers and competitive markets where credit terms win the deal.

How it works

1. You ship and send the documents straight to the buyer, with an invoice that states the due date (for example 60 days from invoice).
2. The buyer collects the goods without paying anything yet.
3. On the due date the buyer pays by wire transfer. If it is late, you chase, and your credit insurer if you have cover.
4. Set a credit limit for each buyer, and track the FEMA realisation deadline from the shipment or invoice date, not from the due date.

Pros: it is the term buyers want, so offering it wins deals that stricter terms would lose, which makes it powerful in a competitive market.

Cons: your working capital is exposed. Money you have already earned sits in another country for two or three months, and a single default lands entirely on you, with no bank to claim against. Many exporters cover it with ECGC or keep part of the order on advance.

Example: a Bengaluru electronics supplier offers net-60 to a distributor it has shipped to for three years, and takes an ECGC policy on the buyer. If the distributor fails, the insurer covers most of the invoice instead of the exporter absorbing the full loss.

Consignment

• Exporter risk: Highest. Your money is tied up in stock abroad, paid only as it sells.
• Importer risk: None. The distributor pays only for what they have already sold.
• Best used for: A subsidiary or a trusted distributor, or testing a new market with stock on the ground.

How it works

1. You ship stock to a distributor abroad under a consignment agreement; you keep ownership until it sells.
2. The distributor sells the goods to its own customers.
3. The distributor pays you for what it has sold, usually monthly, with a stock report.
4. Unsold stock comes back or stays until sold, so insure it and agree in writing who pays storage and return freight.

Pros: it removes the buyer's inventory risk, so it can open a market that no other term would, and it keeps stock close to the customer for faster delivery.

Cons: the exposure is the largest of any method. You own goods overseas that may not sell, may be damaged, or may be hard to recover if the relationship breaks, so it only works with a strong contract, clear terms on who owns the stock, and insurance.

Example: a Jaipur handicrafts exporter places festive-season stock with a US distributor and is paid as each piece sells at retail. The contract keeps ownership with the exporter until sale and insures the inventory, so unsold stock can be returned rather than written off.

What is the difference between D/P and D/A?

Documents against payment (D/P) and documents against acceptance (D/A) are both forms of documentary collection. The difference is when the buyer gets the shipping documents, and so the goods: under D/P the buyer pays first, under D/A the buyer only promises to pay on a later date.

The safest term depends entirely on which side of the deal you are on, and importers often get advice written for exporters. From the buyer's point of view, the safest options are the ones that hold payment back until the goods, or the documents proving they shipped, are in hand.

• Letter of credit: Protects the importer because the bank only pays the exporter against documents that prove a compliant shipment.
• Documents against payment (D/P): The importer pays to collect the documents, so money moves close to when the goods arrive rather than long before.
• Milestone or split payments: A structure such as 30% advance and 70% against a copy of the bill of lading limits how much of the importer's cash is exposed at any one time.

The riskiest term for an importer is the mirror image: full cash-in-advance to a supplier you cannot verify. A reasonable advance is normal practice and not a warning sign. The genuine red flags are a demand for full payment upfront with no middle ground, or a supplier who suddenly asks you to pay a personal account.

For Indian importers, the rules changed on 1 October 2026. The new FEMA (Export and Import of Goods and Services) Regulations, 2026 remove the fixed six-month deadline for paying for imports, so payment now follows the due date in your contract.

They also replace the flat USD 200,000 limit on import advances with a limit your authorised dealer bank sets. Above that limit, the bank can ask for a standby letter of credit or a bank guarantee from the supplier, so check its policy before you agree a large advance.

This is the question experienced exporters ask before they pick a method, and it is more useful than asking which method is best. The failure most exporters fear is a buyer who takes delivery and then goes quiet, turning a sale into a stranded container running up storage charges at a foreign port. Many defaults on credit terms are not outright fraud. They are delay, with the buyer pushing the date again and again while you have no lever to pull.

You reduce that risk by matching protection to the deal:

• Confirm the letter of credit when the issuing bank or its country carries risk, so a bank in your own country also stands behind payment.
• Take out export credit insurance for open-account sales, which covers a large share of the invoice if the buyer defaults or cannot pay for political reasons.
• Split the payment so an advance covers your cost base and the balance follows against shipping documents.
• Do basic due diligence on a new buyer: trade references, company registration, and a smaller first order before you extend real credit.

When a buyer refuses a letter of credit and insists on open account, you do not have to choose between losing the deal and taking the full risk. A hybrid, such as a modest advance plus an insured open-account balance, often bridges the gap and keeps both sides comfortable.

Getting paid from abroad costs four things: a bank fee, intermediary bank charges, the exchange-rate margin and the fees of the method itself, such as letter of credit charges. The exchange-rate margin is usually the largest and the least visible.

The exchange-rate margin is usually the largest. As an illustration, on USD 5,000 received every month, a 2% margin costs about USD 1,200 a year, well above the flat fees most exporters watch.

Specialist cross-border platforms have narrowed that gap. Xflow, for example, lets Indian exporters collect international payments into local receiving accounts abroad, converts at the live mid-market rate and issues an eFIRA for every payment.

Choose by how well you know the buyer first, then by order size, your cash position and the market. A first order with a stranger points to cash-in-advance or a confirmed letter of credit; a buyer of ten years can sit on open account. The same questions set your export payment terms on each contract, from the advance percentage to the credit period.

• Order value and margin: a large order on a thin margin cannot absorb a bad debt, so it justifies the cost of an LC or insurance.
• Cash position: open account and consignment tie up working capital for months; advance payment protects it.
• Market and competition: where rivals offer credit, strict terms can lose the order, so weigh the commercial upside against the payment risk.

You also do not have to stay on one method for ever: most relationships start strict and move down the ladder as the buyer pays on time.

For an Indian exporter, the compliance clock starts when the buyer pays, whichever method you used.

• Bring the money home on time: the rules on the realisation and repatriation of export proceeds changed on 1 October 2026. Under the FEMA (Export and Import of Goods and Services) Regulations, 2026, proceeds must be realised within nine months from the date of shipment for goods and nine months from the date of invoice for services, or twelve months if the export is invoiced in rupees, and your bank can extend the deadline.
• Avoid the advance-only trap: if proceeds stay unrealised for more than a year beyond the due date, further exports can be restricted to full advance payment or an irrevocable letter of credit until the case is resolved.
• Keep the proof of receipt: banks now issue a Foreign Inward Remittance Advice (FIRA) for most export receipts, in place of the older FIRC. Keep it with the invoice for your GST and income tax records.
• Reconcile and claim: for goods, each receipt is matched to the shipping bill in the RBI's EDPMS, and the eBRC supports your GST refund on exports.