There are five methods of payment in international trade, and they are best understood on a single spectrum, from the safest option for the seller to the safest option for the buyer. Ranked from lowest to highest risk for the exporter, they are cash-in-advance, letters of credit, documentary collection, open account, and consignment.
The right choice depends on who you are in the deal, how well you know the other party, the value of the order, and how much working capital either side can afford to tie up.
This guide explains how each method works, who carries the risk, and when each one makes sense. It also covers the part most global guides skip: what an Indian exporter has to do on the compliance side once the money actually lands, and how to move that money without losing a large slice of it to bank charges.
How the five methods compare on risk
Think of the methods as a ladder. At one end, cash-in-advance protects the exporter completely; at the other, consignment protects the importer completely. The others sit in between.
| Method | Exporter risk | Importer risk | Key advantage | Best used for |
|---|---|---|---|---|
| Cash-in-advance | None | Highest | Eliminates credit risk | New clients, small or custom orders |
| Letter of credit | Low | Low | Bank-backed payment guarantee | Large, high-value shipments |
| Documentary collection | Moderate | Moderate | Cheaper and simpler than an LC | Established partners, ocean freight |
| Open account | Highest | None | Boosts competitiveness | Trusted, long-term buyers |
| Consignment | Highest | None | Lowers the buyer's inventory cost | Subsidiaries or trusted distributors |
The pattern is simple: the more secure a method is for you as the exporter, the more risk it pushes onto the buyer, and the harder it can be to win the deal.
The art is matching the method to the relationship.
The five methods, and how each works
Cash-in-advance
How it works: The buyer pays for the goods, in full or in part, before the exporter ships them. Payment usually moves by wire transfer, sometimes called a telegraphic transfer or TT.
Risk level: Very low for the seller, who has the money before parting with any goods. High for the buyer, whose cash is committed before anything arrives.
Best used for: First orders with a buyer you have not worked with before, custom or made-to-order goods, and buyers in markets where credit risk is hard to assess. Because it asks the buyer to trust you completely, demanding full payment in advance can cost you the deal in a competitive market. A structured split, such as 30% on order and 70% against a copy of the bill of lading, is common and easier for buyers to accept.
Letter of credit (LC)
How it works: A letter of credit is a written undertaking from the buyer's bank to pay the exporter once the exporter presents documents that comply exactly with the terms of the credit. Most trade LCs follow the ICC Uniform Customs and Practice for Documentary Credits (UCP 600), the global rulebook banks apply. A confirmed LC adds a second bank, usually in the exporter's country, that also guarantees payment, which matters when the issuing bank or its country carries risk. Our explainer on the standby letter of credit export covers a related backstop that pays only if the buyer defaults.
Risk level: Low for both sides, because a bank stands behind the payment. The catch is documentary. If your paperwork does not match the credit to the letter, the bank can refuse to pay until the buyer agrees to accept the discrepancy, which quietly hands control back to the buyer.
Best used for: Large shipments, newer trading relationships, and buyers in markets where you want a bank guarantee rather than the buyer's word.
Documentary collection (D/C)
How it works: The exporter ships the goods, then routes the shipping documents through the banking system with instructions on when to release them. The bank moves the documents, but it does not guarantee payment. Under documents against payment (D/P), the buyer's bank releases the documents only when the buyer pays. Under documents against acceptance (D/A), the bank releases them when the buyer accepts a time draft, a promise to pay on a future date, so the buyer receives the goods on credit. Handling the paperwork correctly is where an export bill collection process earns its keep.
Risk level: Moderate for both sides, and lower cost than a letter of credit. The important point is that the bank is only a document handler here. Under D/A in particular, the goods can arrive before payment is due, and a buyer who delays leaves you chasing an overdue account.
Best used for: Established relationships in reasonably stable markets, where the buyer has a track record but you still want the banking system to control the documents.
Open account
How it works: The exporter ships the goods and invoices the buyer, who pays later, often 30, 60, or 90 days after delivery. There is no bank guarantee and no documentary control.
Risk level: High for the seller, who has shipped and now waits, and very low for the buyer, who receives goods before paying. This is why buyers push hard for it.
Best used for: Trusted, long-term buyers and competitive markets where credit terms win business. Open account is entirely legal from India, and it is common, but it puts your working capital at risk. Exporters usually pair it with protection such as export credit insurance, or by keeping part of the order on advance.
Consignment
How it works: The exporter ships goods to the buyer or a distributor, who pays only after the goods are sold to the end customer. The exporter keeps ownership until then.
Risk level: Highest for the seller, whose money is tied up in inventory sitting in another country, and lowest for the buyer.
Best used for: Selling through a subsidiary or a trusted partner, or testing a new market where you want stock on the ground. It usually only makes sense with strong contracts and, ideally, insurance covering the goods in transit and in storage.
What is the safest payment method when importing goods?
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, one rule is changing. From 1 October 2026, FEMA (Foreign Exchange Management) rules notified in January 2026 remove the fixed six-month deadline to complete import payments and replace the flat USD 200,000 advance-payment cap with a threshold set by your authorised dealer bank. Check the current position with your bank before structuring a large advance, as regulatory timelines move.
Is SWIFT a payment method?
No, and this trips up a lot of first-time exporters. SWIFT is a secure messaging network that banks use to send standardised payment instructions to each other. It carries the message and does not move the money or decide any of the terms above. The actual method is the wire transfer, or TT, that the SWIFT message instructs.
The same clarity helps with a related myth. "The bank will handle it" often gets read as "the bank will make sure I get paid." In a documentary collection, and in an unconfirmed letter of credit where the issuing bank or its country runs into trouble, the bank is moving documents or messages, not guaranteeing that cash reaches you. Knowing where the guarantee actually sits is the difference between a payment term that protects you and one that only looks like it does.
What happens if the buyer does not pay?
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. Most 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.
How to choose the right payment method
Four variables decide it for most trades:
- How well you know the buyer: 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 order value and your margin: A large order with a thin margin cannot absorb a bad debt, so it justifies the cost of a letter of credit or insurance.
- Your cash-flow position: Open account and consignment tie up your working capital, while advance payment protects it. The stronger your cash position, the more credit you can safely offer.
- The market and competition: In a competitive market, generous terms win business, so you weigh the commercial upside against the payment risk.
As a rough progression, many exporters start a new relationship on advance payment or a letter of credit, move to documentary collection as trust builds, and offer open account only once the buyer is proven. Our guide to export payment terms works through these trade-offs with more worked examples.
The real cost of trade payments, and the modern alternative
Choosing the right term protects you from non-payment. It does not protect you from the cost of moving the money once payment is agreed. Traditional bank wires generally carry an exchange-rate markup plus intermediary, or correspondent, bank fees, and they usually settle over several business days with limited visibility into where the funds are along the way. On a large export invoice, the FX markup alone can quietly cost more than the wire fee that customers tend to focus on.
The reason is the rate. Banks typically convert at a marked-up version of the interbank rate, which is not public, so the true cost is hard to see. A transparent alternative converts at the live mid-market rate (MMR), the same reference rate you would find on a currency data site, with the fee shown separately. This is the gap that specialist cross-border platforms have opened up against the correspondent-bank model, settling faster and pricing the FX out in the open. If you want to compare how funds actually route, our explainer on international payment systems breaks down the rails behind each option.
The wire fee is rarely the real cost
On a cross-border payment, the exchange-rate markup usually dwarfs the flat transfer fee. Always ask what rate you are being given and compare it against the live mid-market rate, not just the advertised fee.
What Indian exporters must do after the money lands
Global guides stop at the buyer paying. For an Indian exporter, that is where the compliance clock starts, and it applies whichever payment method you used.
- Bring the money home on time: Under FEMA, export proceeds must be realised and brought into India within the timeline the RBI specifies, which is nine months from the date of export as of September 2026. Missing it is a compliance problem, not just a delay, so it is worth planning the payment term around it. Our guide to the realisation and repatriation of export proceeds covers the current rules.
- Get the proof of remittance: For most export remittances today, banks issue a Foreign Inward Remittance Advice (FIRA) rather than the older Foreign Inward Remittance Certificate (FIRC). You need this document for your records and for downstream steps.
- Reconcile and claim: The remittance has to reconcile against your shipment in the RBI Export Data Processing and Monitoring System (EDPMS), and the electronic Bank Realisation Certificate (eBRC) is what supports your GST refund on exports.
None of this changes based on whether you used a letter of credit or an open account. It is the same set of steps every time, which is why exporters value a payment flow that produces the documentation automatically rather than leaving them to chase the bank.
How Xflow helps Indian businesses receive trade payments
Xflow is a cross-border payments platform built for Indian businesses that need to receive money from overseas buyers and settle it in rupees. Rather than routing through the correspondent-bank chain, you get a set of Xflow Receiving Accounts, ring-fenced routing accounts in currencies such as USD, GBP, and EUR, and your buyer pays into them as if paying a local account. Funds convert at the live mid-market rate and settle to your Indian bank account, usually on the next business day (T+1).
The compliance layer is handled alongside the payment. Xflow issues an electronic FIRA automatically for each remittance and supports the purpose-code and reconciliation steps, so the paperwork the previous section described is produced as you get paid rather than requested afterwards. Xflow holds final Payment Aggregator - Cross Border (PA-CB) authorisation from the Reserve Bank of India (RBI) for both exports and imports, as of February 2026, and is certified to ISO 27001 and SOC 2.
For services and goods exporters, this can collect international payments with less friction and materially lower FX cost than a traditional wire, with savings of up to 50% on FX costs depending on your bank and volumes.
| Typical bank route | Xflow | |
|---|---|---|
| FX cost | Markup over the mid-market rate | Live mid-market rate, no FX markup |
| Settlement | Often several days | Within 1 business day (T+1) |
| Compliance | FIRA and purpose code handled manually | Free, automated eFIRA |
| Regulatory status | Varies by bank | Final RBI Payment Aggregator - Cross Border (PA-CB) authorisation, as of February 2026 |
For an exporter receiving open-account or advance payments, that means lower FX cost, faster access to funds, and the FIRA generated automatically. Run your own transfer sizes to see the difference on your corridor.
Better rate. Better platform. Better choice.
The bottom line
The five methods of payment in international trade are a spectrum of trust. Cash-in-advance protects the exporter, consignment protects the importer, and letters of credit and documentary collection use a bank to balance the two. Pick the method by how well you know the other party, the size of the order, your cash position, and the market you are selling into, then add protection such as a confirmed letter of credit or export credit insurance where the risk justifies it.
For Indian exporters, plan the term around the FEMA realisation window and the FIRA and eBRC steps that follow, and move the money on a rail that is transparent about the rate. Get both halves right, the payment term and the settlement, and you keep more of what you earned.
Frequently asked questions
Cash-in-advance, letter of credit, documentary collection, open account, and consignment. They run from the safest option for the exporter (cash-in-advance) to the safest for the importer (consignment), with letters of credit and documentary collection in between.
Cash-in-advance is safest because you are paid before shipping. A confirmed letter of credit is the next safest, since a bank in your own country also guarantees payment against compliant documents.
Under documents against payment (D/P), the buyer's bank releases shipping documents only when the buyer pays. Under documents against acceptance (D/A), it releases them when the buyer accepts a time draft, so the buyer gets the goods on credit and pays on a later date.
No. SWIFT is a messaging network banks use to send payment instructions. The payment method is the wire transfer (TT) the SWIFT message instructs. SWIFT carries the message, it does not move the money.
Yes. Open account is legal and common. The real constraints are FEMA rules on realising export proceeds on time and reconciling them in EDPMS, not any prohibition on offering credit terms.
Banks now issue a Foreign Inward Remittance Advice (FIRA) for most export remittances, and the electronic Bank Realisation Certificate (eBRC) supports your GST refund. See our explainer on FIRC vs FIRA for which applies to you.
As of September 2026, export proceeds must be realised and repatriated within nine months of the date of export under FEMA. Confirm the current timeline with your authorised dealer bank, as these rules are periodically revised.
