In international procurement and global trade, selecting the right payment term is one of the most important decisions for both buyers and suppliers. Payment terms determine when and how money will be transferred, who bears the financial risk, and how secure the transaction will be.
Whether you are importing industrial equipment, electrical components, raw materials, or finished products, understanding international payment methods is essential for successful procurement operations.
In this guide, we will explain the most commonly used international payment terms including Telegraphic Transfer (TT), Letter of Credit (LC), Documents Against Payment (DP), Documents Against Acceptance (DA), and Cash Against Documents (CAD), along with their advantages, disadvantages, and practical applications.
What are Payment Terms in International Trade?
Payment terms are mutually agreed conditions between the buyer and seller that specify how and when payment will be made during an international trade transaction.
The selected payment method affects:
- Cash flow management
- Financial risk
- Supplier confidence
- Import processing
- Banking costs
- Transaction security
The ideal payment term should balance the interests of both the importer and exporter.
Why are International Payment Terms Important?
Unlike local procurement, international trade involves long distances, different legal systems, foreign currencies, and multiple intermediaries.
Proper payment terms help:
- Reduce fraud risk
- Ensure timely payment
- Improve supplier relationships
- Protect buyers and sellers
- Facilitate customs and shipping processes
- Support working capital management
Major International Payment Terms
- Advance TT (Advance Telegraphic Transfer)
- TT Against Shipment
- Cash Against Documents (CAD)
- Documents Against Payment (DP)
- Documents Against Acceptance (DA)
- Letter of Credit (LC)
1. Advance TT (Advance Telegraphic Transfer)
Advance TT is one of the simplest international payment methods where the buyer transfers funds to the supplier before shipment of goods.
Process Flow
- Buyer places order.
- Supplier issues Proforma Invoice.
- Buyer transfers payment.
- Supplier receives funds.
- Supplier manufactures and ships goods.
Advantages
- Fast transaction process.
- Low banking charges.
- Simple documentation.
- Preferred by suppliers.
Disadvantages
- Highest risk for buyers.
- No bank guarantee.
- Potential quality or delivery issues.
Best Used For
- Trusted suppliers.
- Small-value imports.
- Sample orders.
- Long-term business relationships.
2. TT Against Shipment
In this method, the supplier ships the goods first and then sends shipping documents to the buyer. Payment is made after shipment but before goods are released.
This method provides a balanced risk position when the buyer and supplier have established trust.
3. Cash Against Documents (CAD)
CAD is a payment arrangement where the supplier ships goods and submits shipping documents to the bank. The buyer receives the documents only after making payment.
Process Flow
- Supplier ships goods.
- Documents submitted to supplier's bank.
- Documents sent to buyer's bank.
- Buyer pays.
- Documents released.
- Goods cleared from customs.
Advantages
- More secure than Advance TT.
- Lower banking costs than LC.
- Suitable for repeat business.
Disadvantages
- No guarantee of product quality.
- Limited protection if supplier defaults.
4. Documents Against Payment (DP)
Documents Against Payment is a collection-based payment method where the buyer must pay immediately before obtaining shipping documents.
Process Flow
- Supplier ships goods.
- Shipping documents sent to bank.
- Bank presents documents to buyer.
- Buyer pays immediately.
- Documents released.
Advantages
- Safer for exporters.
- Lower cost compared to LC.
- Common in international trade.
Disadvantages
- Importer must pay before inspecting goods.
- Risk remains if product quality differs.
5. Documents Against Acceptance (DA)
DA allows the buyer to receive shipping documents before making payment. The buyer signs a time draft agreeing to pay at a future date.
Typical Credit Periods
- 30 Days
- 60 Days
- 90 Days
- 120 Days
Advantages
- Improves buyer cash flow.
- Provides trade credit.
- Useful for large-volume imports.
Disadvantages
- Higher risk for exporters.
- Risk of delayed payment.
- Difficult legal recovery in some countries.
6. Letter of Credit (LC)
Letter of Credit (LC) is one of the most secure and widely used payment methods in international trade.
An LC is a written commitment issued by the buyer's bank guaranteeing payment to the supplier provided that all specified documents are presented correctly and within the agreed time frame.
Parties Involved in an LC Transaction
- Applicant (Importer/Buyer)
- Beneficiary (Exporter/Supplier)
- Issuing Bank
- Advising Bank
- Confirming Bank (if applicable)
- Negotiating Bank
LC Process Step-by-Step
- Buyer and supplier sign purchase agreement.
- Buyer applies for LC through bank.
- Issuing bank opens LC.
- LC transmitted to advising bank.
- Supplier reviews LC terms.
- Supplier manufactures goods.
- Goods shipped.
- Shipping documents prepared.
- Documents submitted to bank.
- Bank verifies compliance.
- Payment released.
- Buyer receives documents and clears goods.
Common Documents Required Under LC
- Commercial Invoice
- Packing List
- Bill of Lading
- Certificate of Origin
- Insurance Certificate
- Inspection Certificate
- Beneficiary Certificate
Types of Letter of Credit
- Irrevocable LC
- Revocable LC
- Sight LC
- Usance LC
- Confirmed LC
- Transferable LC
- Back-to-Back LC
- Standby LC
Advantages of LC
- High payment security.
- Bank-backed commitment.
- Suitable for high-value transactions.
- Reduces international trade risk.
- Preferred for new supplier relationships.
Disadvantages of LC
- Higher banking charges.
- Complex documentation.
- Longer processing time.
- Discrepancies may delay payment.
Comparison of International Payment Methods
| Payment Method | Buyer Risk | Supplier Risk | Cost | Security |
|---|---|---|---|---|
| Advance TT | High | Low | Low | Low |
| CAD | Medium | Medium | Medium | Medium |
| DP | Medium | Medium | Medium | Medium |
| DA | Low | High | Medium | Medium |
| LC | Low | Low | High | Very High |
How Procurement Professionals Select Payment Terms
The selection depends on:
- Supplier relationship history
- Order value
- Country risk
- Lead time
- Supplier bargaining power
- Cash flow availability
- Import regulations
Many organizations use LC for new suppliers and gradually shift to TT or DP after trust is established.
Frequently Asked Questions (FAQs)
Which payment method is safest in international trade?
Letter of Credit (LC) is generally considered the safest payment method because banks guarantee payment upon successful document compliance.
What is the difference between TT and LC?
TT is a direct bank transfer between buyer and supplier, while LC involves a bank guarantee and document verification process.
Which payment term is most commonly used for imports in Bangladesh?
LC remains one of the most commonly used payment methods for commercial imports in Bangladesh due to regulatory and banking requirements.
Can a supplier request 100% advance payment?
Yes. Many suppliers request full or partial advance payment, especially for customized products or first-time transactions.
What happens if there is a discrepancy in LC documents?
The issuing bank may reject the documents or seek approval from the importer before releasing payment.
What is a Sight LC?
A Sight LC allows payment immediately after compliant documents are presented and verified by the bank.
What is a Usance LC?
A Usance LC provides deferred payment after an agreed credit period such as 30, 60, or 90 days.
Which payment method has the lowest banking cost?
Advance TT generally has the lowest banking charges because it involves a simple bank transfer without complex documentation.
Conclusion
Choosing the right payment term is critical for successful international procurement and global trade operations. Advance TT, CAD, DP, DA, and LC each offer different levels of security, cost, and risk allocation. Procurement professionals should evaluate supplier reliability, order value, country risk, and organizational cash flow before selecting the most suitable payment method.
For new suppliers and high-value transactions, LC remains the preferred option due to its strong banking protection. For trusted suppliers and repeat business, TT and collection-based methods often provide faster and more cost-effective solutions.
🔗 Recommended Reading
Master in procurement by exploring these related guides.
🚢 Incoterms 2020 GuideUnderstand FOB, CIF, CFR, EXW, DDP and other Incoterms used in international trade. Read More → |
📦 HS Code GuideLearn product classification, customs duty calculation and import compliance requirements. Read More → |
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