International Payment Methods Compared: Seller and Buyer Risk

International payment methods compared: cash in advance, letters of credit, collections, open account. Risk for seller and buyer, costs, timelines and examples.

Every export contract answers two questions that have nothing to do with the goods: when does the money move, and what does each side hold while it waits? If you ship first, you trust the buyer. If the buyer pays first, the buyer trusts you. International payment methods are the techniques that traders and banks have built to share that trust, and to replace it with a bank's undertaking when it is missing.

This lesson compares the five methods you will meet in practice: cash in advance, the letter of credit, the documentary collection, open account and consignment. For each one you will see what the seller risks, what the buyer risks, what it costs and how long it takes to get paid. Then you will learn a simple method for choosing, with a worked example of an Algerian exporter facing three very different buyers.

The choice matters more than most exporters think. The wrong method either loses you the deal, because the buyer finds a competitor with easier terms, or leaves you with an unpaid invoice in a country where you cannot afford to sue.

What are the main international payment methods?

There are four core methods, plus consignment as a special case.

• Cash in advance: the buyer pays all or part of the price before the goods are shipped, usually by bank transfer. See cash in advance and partial advance payments.
• Letter of credit (documentary credit): the buyer's bank, the issuing bank, gives an irrevocable undertaking to pay the seller if the seller presents documents that comply with the terms of the credit. It is governed in practice by the ICC's UCP 600. See letters of credit explained.
• Documentary collection: the seller ships, then hands the shipping documents to its bank, which sends them to a bank in the buyer's country. That bank releases them to the buyer only against payment (D/P) or against acceptance of a bill of exchange (D/A). It is governed by URC 522. See documentary collection.
• Open account: the seller ships and sends the documents directly to the buyer, who pays on the agreed due date, for example 60 days after the invoice. See open account.
• Consignment: the seller ships goods that stay its property until the buyer, usually a distributor, sells them to its own customers and only then pays. It is the riskiest method for the seller and is used mainly with a subsidiary or a long-trusted distributor.

The risk spectrum: who carries what?

The methods sit on a spectrum. At one end the seller carries almost no risk and the buyer carries almost all of it; at the other end, the opposite.

Read the table with two nuances in mind. First, a letter of credit protects the seller only if the seller can produce documents that comply; a bad presentation turns it into something close to a collection. Second, the buyer under a letter of credit pays against documents, not goods: if the seller ships poor goods with perfect documents, the bank still pays. That is why buyers add inspection certificates as required documents.

How do the costs and timelines compare?

Bank fees vary by bank, country and amount, so treat the figures below as orders of magnitude, not quotations. Ask your bank for its tariff and negotiate it once your volumes justify it.

The cost of credit is a cost too. If you give a buyer 90 days, you finance the deal for 90 days: on USD 100,000 at a financing cost of 8% a year, that is about USD 2,000 that should be in your price.

How do you choose the right payment method?

Five factors drive the decision.

1. The buyer. How long have you worked together, how has it paid, what do credit reports and bank references say? A new buyer justifies more security than a distributor that has paid on time for five years.
2. The country. Are there foreign-exchange shortages, transfer delays, sanctions, political instability? Country risk is often a better argument for a confirmed credit than buyer risk.
3. The amount and your capacity to lose it. A USD 8,000 sample order on open account is a reasonable bet; a USD 400,000 order that equals two months of your turnover is not.
4. The goods. Perishable or custom-made goods are hard to resell if the buyer refuses them, which argues for security before shipment. Standard commodities can be resold more easily.
5. The market and the competition. If competitors in your sector sell on 60 days open account, insisting on a letter of credit may cost you the deal. You then protect yourself differently, with export credit insurance or factoring.

A practical rule many trainers teach: start secure with a new relationship, then relax the terms as the buyer earns your trust, and write the next step into your sales plan.

Worked example: one exporter, three buyers

An Algerian producer of ceramic tiles and olive oil receives three orders in the same month.

Buyer A, a new importer in Abidjan, orders 2 containers of tiles for USD 48,000, CFR Abidjan. It has no track record with the exporter and the order is significant. The exporter asks for a letter of credit at sight, confirmed by its own bank. Indicative charges for the exporter: advising USD 150, confirmation 1.2% for the period, so USD 576, payment commission 0.15%, so USD 72. Total about USD 800, or 1.7% of the order, built into the price.

Buyer B, a distributor in Marseille that has bought olive oil for six years and always paid on time, orders EUR 36,000. The exporter sells on open account at 60 days from the bill of lading date, with the buyer covered by its export credit insurance policy. Cost: incoming transfer fees and the insurance premium, plus 60 days of financing, about EUR 410 at 7% a year.

Buyer C, a trader in Jeddah met at a trade fair, wants 18 tonnes of olive oil for USD 81,000 but refuses a letter of credit as too expensive. The exporter proposes 30% in advance, USD 24,300 by transfer before production, and the balance of USD 56,700 by documentary collection D/P. The deposit covers the cost of re-routing or reselling the goods if the buyer refuses the documents; the D/P keeps control of the original bills of lading until the balance is paid.

Can you combine payment methods?

Yes, and most experienced exporters do. Common combinations:

• Deposit plus balance: 20 to 50% in advance, the balance by letter of credit, collection or open account.
• Open account plus protection: export credit insurance, a standby letter of credit, or a bank payment guarantee that you call only if the buyer fails to pay.
• Letter of credit plus confirmation: the issuing bank's undertaking, doubled by a bank you trust.
• Collection plus aval: under D/A, a bank in the buyer's country guarantees the accepted bill of exchange by adding its aval.

Are payment methods regulated by law?

The ICC rules (UCP 600, URC 522, URDG 758) are not laws: they apply because the credit, the collection instruction or the guarantee says so. But many countries have exchange-control rules that limit which methods may be used or what terms may be granted.

Algeria is a well-known example. Article 69 of the 2009 Supplementary Finance Law made the documentary credit the only permitted method of paying for imports; Article 81 of the 2014 Finance Law reinstated the documentary collection (remise documentaire) as an alternative. On the export side, Banque d'Algérie Regulation No. 26-02 of 23 July 2026 requires export proceeds to be repatriated within 120 days of shipment for goods, and allows payment terms beyond 120 days, up to a maximum of 180 days, only if the operation is covered beforehand by export credit insurance with the national authorised insurer. Export and import operations must also go through bank domiciliation.

Common mistakes

• Choosing by habit: "we always ask for a letter of credit" loses good buyers; "we always sell on open account" eventually loses money.
• Ignoring country risk: an excellent buyer in a country that blocks transfers will still pay you late.
• Forgetting the cost of credit in the price: 90 days of payment terms is a discount you give without noticing.
• Accepting a letter of credit you cannot comply with: impossible deadlines or documents you cannot obtain make the credit worthless.
• Releasing original documents before payment when the method was supposed to protect you, for example by sending the bills of lading directly to a buyer under a D/P deal.
• Writing vague payment terms: "payment by bank transfer" without a due date, a currency, the triggering event and who pays the charges is an invitation to dispute.

Putting it into practice

On Incoforms, each sale you record creates a receivable in the Finance & debts module, attached to the client or to a non-client party, with its currency, due date and any partial payments as they arrive. Overdue amounts are flagged automatically, so you can see which buyers deserve better terms and which need more security. The payment terms you choose also feed the shipment costing, where payment risk is part of each shipment's risk score.