International Trade Payment Methods: How to Choose Safe Terms for Export and Import

The payment risk spectrum: exporter and importer sit at opposite ends

Every payment method answers one question: does the money move first or do the goods move first, and who controls the goods in between? The exporter wants to be paid before losing control of the cargo; the importer wants the goods, or at least documents proving the goods were shipped as agreed, before paying. No method is optimal for both sides at once, so choosing a payment term is really about allocating risk according to trust, bargaining power, shipment value and country risk.

Ranked from lowest to highest risk for the exporter, the main methods are: T/T in advance, confirmed letter of credit, sight letter of credit, usance letter of credit, documentary collection D/P or CAD, documentary collection D/A and, finally, open account. For the importer the order is almost exactly reversed. Bank guarantees and standby letters of credit (SBLCs) are not a step on this scale; they are security instruments, usually combined with open account or advance payment to bring the residual risk to an acceptable level.

Core principle: in letters of credit and collections, banks deal in documents, not in goods. A bank does not check whether the cargo is of the right quality; it only checks whether the documents comply with the stated terms.

Overview of the main international payment methods

T/T advance payment

The buyer remits funds through its bank via a SWIFT transfer before the seller ships, either in full or in part. This is the safest method for the exporter and the riskiest for the importer. In Vietnam a very common structure is a 20 to 30 percent T/T deposit, with the balance paid against a copy of the bill of lading or before the seller arranges a telex release.

Open account

The seller ships and sends the documents directly to the buyer, who pays after an agreed credit period such as 30, 60 or 90 days. It is simple and cheap, widely used between long-standing partners, related companies and large retail chains, but the seller carries almost all of the credit risk.

Documentary collection: D/P and D/A

After shipment the seller sends the documents through its bank to the buyer's bank with an instruction to release them only against payment (D/P) or against the buyer's acceptance of a time draft (D/A). The banks control the documents but do not undertake to pay on the buyer's behalf.

Cash against documents (CAD)

The buyer deposits funds or opens a trust account with a bank, often in the seller's country, together with a memorandum listing the documents to be presented. The bank pays the seller when compliant documents are presented. In some markets CAD is also used almost as a synonym for D/P.

Letters of credit at sight and usance

The issuing bank gives the seller an independent undertaking to pay if the seller presents documents that comply with the credit. A sight L/C pays when compliant documents are presented; a usance L/C pays at a future maturity date; a UPAS L/C pays the seller at sight while the buyer settles only at maturity.

Standby letters of credit and bank guarantees

These are "just in case" undertakings. The beneficiary only claims on the bank if the other party fails to perform. An SBLC lets a seller trade on open account with confidence, while an advance payment guarantee protects a buyer who pays upfront.

Payment terms, Incoterms® rules and transport documents must fit together

Incoterms® rules allocate delivery, transfer of risk and costs, but they say nothing about payment or transfer of ownership. The payment term must therefore be designed together with the delivery term. Incoterms® is a trademark of the International Chamber of Commerce.

• Under CFR, CIF, CPT and CIP the seller contracts for carriage, so it obtains the transport document itself and controls presentation under an L/C or collection. The bill of lading is normally marked "Freight prepaid".
• Under FOB and FCA the buyer nominates the carrier or forwarder, so the seller depends on the buyer's nominee to receive the bill of lading. Incoterms® 2020 added an FCA option under which the parties can agree that the buyer instructs its carrier to issue an on-board bill of lading to the seller, which is very useful for L/C payment.
• EXW rarely works with an L/C or a collection because the seller does not control export clearance and seldom obtains a transport document in its own name.
• Under DAP, DPU and DDP the seller bears cargo risk up to destination, while an L/C usually pays against shipment documents at origin. Avoid L/C conditions that require documents the seller cannot produce, such as a receipt signed by the buyer.
• CIF and CIP require the seller to insure and supply an insurance document. Incoterms® 2020 sets minimum cover at Institute Cargo Clauses (C) for CIF and Clauses (A) for CIP unless otherwise agreed. UCP 600 requires the insured amount to be at least 110 percent of the CIF or CIP value when the credit is silent.

The ocean bill of lading as a document of title

An original bill of lading is a receipt for the goods, evidence of the contract of carriage and a document of title: the lawful holder of the original can claim the cargo at destination. That is why banks can "hold the goods" in L/C and collection transactions: holding the full set of originals means controlling the cargo.

• To-order bill of lading (To order, To order of shipper, To order of issuing bank): transferable by endorsement. L/Cs commonly require a B/L "made out to the order of [issuing bank]" so the bank controls the goods until the buyer pays or commits to pay.
• Straight bill of lading: names a specific consignee and cannot be transferred by endorsement. In some jurisdictions a named consignee can obtain delivery without surrendering the original, which weakens its value as payment security.
• Telex release or surrendered B/L: the shipper surrenders the originals at origin and the carrier instructs its destination agent to release without originals. Once surrendered, the seller has lost control of the goods, so only agree after being paid in full.
• Sea waybill: not a document of title; the goods are delivered to the named consignee on proof of identity. Suitable for open account or full advance payment, but not for D/P or CAD where the seller wants to keep the cargo as security.
• Air waybills and road or rail consignment notes (CMR, CIM) are not documents of title either. For air shipments under an L/C, banks usually require the AWB to be consigned to the issuing bank to retain control.

The typical payment document set

Depending on the product and market you may also need a phytosanitary certificate, health certificate, fumigation certificate, certificate of analysis, beneficiary's certificate or a copy of the shipping advice.

ICC rules that govern international trade payments

ICC rules are not law; they apply when the transaction incorporates them, for example field 40E of an MT700 stating UCP LATEST VERSION. In practice almost every bank in the world, including in Vietnam, handles credits and collections under these rules.

Trade finance: turning receivables into cash

Choosing a payment method is not only about risk but also about working capital. Buyers want time to pay, sellers want cash early. Trade finance tools bridge the gap.

• Negotiation and discounting: a bank advances funds to the exporter against a complying L/C presentation or an accepted draft, less interest and fees. It may be with or without recourse depending on the issuing or confirming bank's undertaking.
• Factoring: a factor buys receivables from open account or D/A sales, often with ledger management and optional protection against buyer insolvency. International two-factor schemes usually operate under the FCI General Rules for International Factoring (GRIF).
• Forfaiting: a financier buys, without recourse, medium- or long-term receivables that are guaranteed or accepted by a bank, such as avalised bills of exchange or deferred payment L/Cs. The ICC Uniform Rules for Forfaiting (URF 800) cover this business.
• Export credit insurance: protects the seller against non-payment caused by buyer insolvency, protracted default or political events. A credit insurance policy also makes it easier to borrow working capital or sell receivables to a bank.
• Supply chain finance (reverse factoring): a creditworthy large buyer arranges with a bank for its suppliers to be paid early against invoices the buyer has approved.

Foreign exchange and payment practice in Vietnam

Under Vietnam's foreign exchange regulations, Vietnamese companies may price and settle export and import contracts with foreign counterparties in foreign currency, and all foreign currency receipts and payments must go through accounts at banks licensed for foreign exchange. Export proceeds must be repatriated to the company's foreign currency account at a bank in Vietnam. Conversely, transactions between two residents inside Vietnam are generally restricted from using foreign currency, except where the law permits.

• USD is by far the most common contract currency, followed by EUR, JPY, CNY and KRW. When the contract currency differs from your revenue currency, consider exchange rate risk and the forwards or options that banks offer.
• When paying for imports, the bank will ask for the contract, invoice and, depending on the case, the customs declaration. For advance payments the bank follows up until the goods arrive and the import declaration is filed. The beneficiary name and account must match the contract; third-party payment should be expressly provided for.
• A customer transfer is commonly called an MT103, an L/C issuance an MT700, an L/C amendment an MT707, a guarantee an MT760, and collections use MT4xx messages. For cross-border payments SWIFT has moved to ISO 20022 (pacs.008 in place of MT103), but the MT names are still widely used in conversation.
• Transfer charges have three options: OUR (remitter pays all), SHA (each side pays its own bank) and BEN (beneficiary pays all). Under SHA the seller often receives slightly less because of intermediary bank deductions, so agree in the contract who bears the difference.
• Banks with strong trade finance desks in Vietnam include the state-owned commercial banks, many large joint-stock banks and the foreign banks. When a foreign buyer wants a Vietnamese-issued L/C confirmed, or the reverse, check correspondent bank limits early.

How to choose the right payment method

Four questions help you decide quickly. How long have you traded with this counterparty, and is its payment record good? What is the country and transfer risk of the buyer's market? How large is the shipment relative to your own financial strength? Can the goods be resold easily if the buyer refuses them? Custom-made goods, perishables or high-value orders with new partners call for an L/C or advance payment; standard goods with long-standing partners can move gradually to D/P and to open account backed by credit insurance.

Red flags and fraud prevention

• Payment-diversion email fraud: criminals compromise or spoof a partner's mailbox and send an invoice with new bank details. Always verify any change of beneficiary account by calling a phone number you already had, never one quoted in the new email. Misdirected transfers are very hard to recover.
• Look-alike email domains: a single altered character, such as l instead of i, or a different domain ending. Check the sender address carefully whenever money is involved.
• Fake or edited bill of lading copies: verify the B/L number, container numbers and vessel on the carrier's tracking system or through your forwarder before paying the balance.
• An unknown buyer placing a large order at an unusually high price but proposing an L/C with odd clauses, for example documents that must be signed by the buyer or its agent, which makes it impossible for the seller to present a complying set on its own.
• An L/C from an unfamiliar bank sent directly by email as a PDF instead of via SWIFT to an advising bank. Only rely on a credit that your own bank has authenticated.
• Requests for a telex release before full payment, or for original B/Ls to be couriered directly to the buyer on a promise of later payment.

GLG can help verify vessel schedules and bill of lading status and coordinate B/L issuance to L/C requirements, but payment decisions and document examination remain the responsibility of the trading parties and their banks.

This content is for general guidance and does not replace legal or banking advice for a specific transaction.