Export Payment Terms Explained: Advance, LC, D/P, D/A and Open Account

The five common export payment terms are advance payment, letter of credit, documents against payment (D/P), documents against acceptance (D/A) and open account. They run from safest to riskiest for the exporter. Under D/P, D/A and most LCs, a bill of exchange travels with the shipping documents and is what the buyer pays or accepts.

Payment terms usually get agreed in a quick email. But they decide which documents you prepare, whether a bank checks them, who holds the bill of lading, and what you can do if the buyer goes quiet. It's worth choosing them deliberately.

The five terms at a glance

Advance payment

The buyer pays all or part of the order before you ship, usually against a proforma invoice. Many SME exporters use a split, such as 30% advance and 70% against documents. Indian exporters should keep the inward remittance advice from the bank, as it's linked to the shipment later.

Letter of credit

The buyer's bank undertakes to pay if you present documents that comply with the credit. The bank checks the documents, not the goods, so payment security is only as good as your paperwork. Read the credit field by field (how to read a letter of credit) and avoid the common LC discrepancies.

Documents against payment (D/P)

You ship, then send the documents through your bank to the buyer's bank as a documentary collection, usually under the ICC's URC 522 rules. The buyer's bank releases the documents, including the original bill of lading, only when the buyer pays the sight bill of exchange. Without the B/L, the buyer can't take the cargo.

The risk: the banks don't promise payment. If the buyer refuses, your goods sit at a foreign port while you find another buyer or pay to ship them back.

Documents against acceptance (D/A)

Same route, but the buyer gets the documents by accepting a usance bill of exchange, for example payable 60 days after sight, rather than paying. They take the goods immediately and owe you on the maturity date. You've effectively given credit backed only by a signed draft.

Open account

You ship and send the documents straight to the buyer, who pays on agreed terms, such as 30 or 60 days from invoice. It's common with long-standing buyers and in markets where buyers expect it. It needs good tracking of customer balances and a clear reminder routine.

Where the bill of exchange in export fits

A bill of exchange (or draft) is your written order to the buyer, or to a bank under an LC, to pay a sum on sight or on a set date. It's central to D/P and D/A collections and to many LCs. It's also what a bank can discount, giving you cash before maturity under export bill discounting. The bill of exchange guide covers its parts; under an LC, see how to draw it so it isn't discrepant.

Which documents each term needs

• All terms: commercial invoice, packing list, transport document, plus any certificate of origin, insurance or inspection documents the buyer needs.
• LC: exactly the documents in field 46A, in the form the credit specifies, plus the draft if 42C asks for one.
• D/P and D/A: the full set plus a bill of exchange and a collection instruction to your bank, usually with a full set of original B/Ls made out to order.
• Advance and open account: the set goes directly to the buyer; banks only handle the money.

How to choose

• New buyer, unknown market: advance or a confirmed LC.
• Repeat buyer with a good payment record: D/P, then D/A or open account.
• Large orders with tight margins: LC, so the bank takes over the buyer's payment risk.
• Any credit term: consider export credit insurance (in India, ECGC) before extending D/A or open account.

Frequently Asked Questions

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

Under D/P, the buyer must pay before the bank releases the documents. Under D/A, the buyer only accepts a usance bill of exchange to get the documents and pays later, so the exporter carries the credit risk until maturity.

What is a bill of exchange in export?

An unconditional written order from the exporter (drawer) to the buyer or a bank (drawee) to pay a set amount at sight or on a future date. It's used in documentary collections and many letters of credit.

Is a documentary collection safer than open account?

Somewhat. Under D/P, the buyer can't get the documents, and so the goods, without paying. But unlike an LC, no bank guarantees payment.

What is a usance bill of exchange?

A draft payable at a future date, such as 90 days after sight or after the bill of lading date, rather than on presentation.

Whatever the terms, Bilexor keeps your invoices, packing lists and customer balances on one record, so you can see what's been shipped, what's been paid and what's overdue. Get early access. Informational only, not financial advice.