Every international order involves a basic tension. The seller wants to be sure they will be paid before goods leave their control, while the buyer wants to be sure the goods are right before money leaves their account. Payment terms are how the two sides balance that risk.
This guide explains the most common export payment terms used in trade with India, including advance payment, letters of credit, documentary collections and open account, and how to choose the right structure for your situation.
The Payment Risk Spectrum
Payment methods can be arranged on a spectrum from most secure for the seller to most secure for the buyer:
- Advance payment – lowest risk for the seller, highest for the buyer
- Letter of credit – balanced, with banks involved
- Documentary collection (D/P and D/A) – moderate, banks handle documents but do not guarantee payment
- Open account – lowest risk for the buyer, highest for the seller
Many real-world arrangements combine methods, such as a partial advance with the balance against documents.
Advance Payment
The buyer pays all or part of the order value before production or shipment, usually by bank transfer. A common structure for new relationships is a deposit when the order is confirmed and the balance before dispatch or against a copy of the bill of lading.
For buyers: Advance payment is simple and inexpensive in bank charges, but the buyer depends on the seller’s reliability. Reduce risk by verifying the supplier thoroughly, approving samples first and linking the balance payment to a passed pre-shipment inspection.
Letter of Credit (LC)
A letter of credit is an undertaking by the buyer’s bank to pay the seller, provided the seller presents documents that comply exactly with the LC terms. Most letters of credit are issued subject to UCP 600, the uniform customs and practice rules published by the International Chamber of Commerce.
How an LC Works
- Buyer and seller agree to use an LC in the sales contract.
- The buyer applies to their bank, which issues the LC.
- The LC is advised to the seller through a bank in India.
- The seller ships the goods and presents the required documents to the bank.
- Banks check the documents. If they comply, payment is made at sight or on the agreed future date.
Key Points About LCs
- Banks deal in documents, not goods. Payment depends on compliant documents, not on inspecting the actual products. Buyers who want quality assurance should require an inspection certificate among the documents.
- Precision matters. Small discrepancies, such as a misspelt name or inconsistent description, can delay payment.
- Costs: LCs involve bank fees on both sides, making them more expensive than simple transfers.
- Confirmed LCs: A second bank, often in the seller’s country, adds its own payment undertaking, which reduces the seller’s risk further.
Our export documents checklist explains the documents commonly called for in letters of credit.
Documentary Collections: D/P and D/A
In a documentary collection, banks act as channels for documents but do not guarantee payment. Collections are commonly handled under the ICC’s Uniform Rules for Collections (URC 522).
Documents Against Payment (D/P)
The buyer’s bank releases shipping documents, which are needed to collect the goods, only after the buyer pays. The seller’s risk is that the buyer refuses to pay, leaving goods at the destination port.
Documents Against Acceptance (D/A)
The buyer receives documents after accepting a bill of exchange promising to pay on a future date, for example 60 or 90 days later. This gives the buyer credit but increases the seller’s risk.
Open Account
Under open account, the seller ships goods and documents directly to the buyer, who pays on agreed credit terms. It is common between long-standing partners and large retailers with strong credit. Sellers often protect themselves with export credit insurance; in India, the Export Credit Guarantee Corporation of India (ECGC) offers cover for exporters.
Comparing Payment Terms
| Method | Seller risk | Buyer risk | Cost and complexity |
|---|---|---|---|
| Advance payment | Very low | High | Low |
| Letter of credit | Low | Low to moderate | High |
| Documents against payment | Moderate | Moderate | Moderate |
| Documents against acceptance | Higher | Low | Moderate |
| Open account | High | Very low | Low |
How to Choose the Right Payment Terms
- Relationship stage: New relationships often start with advance or LC terms and move towards collections or open account as trust builds.
- Order value: High-value orders may justify the cost of an LC; small trial orders usually do not.
- Country risk: Political, currency or banking risks in either country can make bank-backed methods more attractive.
- Cash flow: Buyers may prefer deferred payment; sellers may need advance funds to buy raw materials.
- Product type: Custom-made goods that cannot easily be resold elsewhere usually require a deposit.
Practical Tips for Buyers
- Agree payment terms, currency and bank charges in writing before production starts.
- Pay only to bank accounts in the supplier’s verified company name, and confirm any change of bank details by phone.
- Link payments to milestones such as sample approval, inspection results or shipping documents.
- For LCs, share a draft with the seller before issuing it so they can confirm they can comply.
- Align payment terms with the agreed Incoterm; see our Incoterms 2020 guide.
Frequently Asked Questions
Which payment term is most common for first orders from India?
A partial advance with the balance before dispatch or against documents is common, as are letters of credit for larger orders.
Are LCs worth the cost?
For larger orders or new relationships, many businesses consider the added security worth the bank charges. For small orders, simpler methods are usually more practical. Your bank can advise on the costs for your situation.
Protecting Yourself from Payment Fraud
Payment fraud in international trade often involves fake emails that appear to come from a genuine supplier, announcing a “new” bank account. Buyers who transfer money to the new account may lose it entirely. Simple controls prevent most of these losses: confirm any change of bank details by calling a known contact on a previously verified number, check that the beneficiary name matches the supplier’s registered company name, and be cautious of urgent requests to pay quickly. Keeping all payment instructions in signed proforma invoices also creates a clear record.
Discuss Terms with Sunil Global Trade
Sunil Global Trade agrees clear commercial terms, including pricing, trade terms and payment structure, at the quotation stage so buyers know exactly what to expect. Contact our team to discuss your requirement. This article is general information and not financial or legal advice; consult your bank or advisers for decisions specific to your business.
