International trade runs on four common payment terms. Advance payment (TT) pays the exporter before shipment and is safest for the seller. A letter of credit (LC) puts a bank's payment undertaking between the parties, balancing risk at the cost of bank charges. Documents against payment (DP) releases shipping documents through banks only when the buyer pays, while documents against acceptance (DA) releases them against a promise to pay later, leaving the exporter exposed. Most agro trades settle on advance, LC or DP, often combining a part advance with a documentary balance.
The four common payment terms at a glance
Every payment term is really an answer to one question: who is exposed between the moment the goods ship and the moment the money moves? The four standard answers, from most seller-friendly to most buyer-friendly, are:
- Advance payment (TT): buyer pays before shipment; exporter carries no payment risk.
- Letter of credit (LC): the buyer's bank undertakes to pay against compliant documents.
- Documents against payment (DP): banks release the shipping documents only when the buyer pays.
- Documents against acceptance (DA): banks release the documents when the buyer accepts a bill of exchange promising to pay at a later date.
Open account - shipping first and invoicing later - also exists, but in cross-border agro trade it is generally reserved for long-standing, high-trust relationships.
Advance payment (TT) explained
Under advance payment the buyer wires funds by telegraphic transfer (TT) before the goods ship - either the full value or, more commonly, a percentage to confirm the order. For the exporter this is the cleanest term: no bank fees beyond the wire, no document scrutiny, money in hand before the cargo leaves.
For the importer it is the opposite: funds are committed before the goods are seen, so the buyer relies entirely on the supplier's integrity. That is why full advance is usually limited to small trial orders or sellers with strong reputations, while part advance (an upfront percentage with the balance against documents or arrival) is the everyday compromise in agro trade.
Letter of credit (LC) explained
A letter of credit is an undertaking by the buyer's bank: if the exporter presents documents that comply with the terms of the credit - typically the invoice, packing list, bill of lading, and certificates named in the LC - the bank pays. The buyer's creditworthiness is replaced by the bank's, which is why LCs are the standard tool for large consignments between parties who do not yet fully trust each other.
Key variations to understand before agreeing an LC:
- Sight vs usance: a sight LC pays once the documents are checked and found compliant; a usance (deferred payment) LC pays at a later agreed date, such as a set number of days after the bill of lading date, effectively giving the buyer credit.
- Confirmed vs unconfirmed: an unconfirmed LC carries only the issuing bank's undertaking. A confirmed LC adds a second undertaking from a bank in the exporter's country, protecting the exporter against issuing-bank or country risk - at an extra confirmation fee.
- Discrepancies: banks examine documents strictly. Spelling differences, late shipment, missing signatures or inconsistent quantities can all be raised as discrepancies, which give the buyer the option to refuse or renegotiate. Careful document preparation is the heart of working under LCs; our export documentation checklist covers the full set.
LCs cost more than other terms - issuance, advising, confirmation and negotiation charges all add up - and who bears which charge should be agreed in the contract.
Documents against payment (DP)
DP (also written D/P, or CAD - cash against documents) is a documentary collection. The exporter ships, then routes the original documents through its bank to the buyer's bank with the instruction: release only against payment. The buyer cannot clear the cargo without the documents, so payment and control of the goods change hands together.
The crucial difference from an LC: no bank promises to pay. The banks act only as secure messengers. If the buyer walks away, the exporter still owns cargo sitting in a foreign port, accruing storage and facing resale at a discount. DP is therefore common where there is reasonable trust and a liquid destination market for the goods, and it is considerably cheaper than an LC.
Documents against acceptance (DA)
DA works through the same banking channel, but the documents are released when the buyer accepts a bill of exchange - a signed promise to pay on a future date, say a set number of days after sight or after the bill of lading date. The buyer gets the goods now and pays later.
For the exporter this is the riskiest documentary term: once the documents are released, the only security is the buyer's signature. If the buyer fails to pay at maturity, the goods are long gone and recovery becomes a legal matter in the buyer's country. Exporters typically reserve DA for established customers, and some protect themselves with export credit insurance.
How exporters and importers choose
In practice the term is negotiated alongside price, and three factors dominate:
- Trust and track record: first orders commonly run on full or part advance, or a confirmed sight LC. As the relationship matures, parties often move to unconfirmed LC, then DP, trading security for lower cost and friction.
- Order size: bank charges make LCs proportionally expensive on small consignments, so small orders lean towards advance or DP, while large contracts justify LC costs.
- Market practice: some destination markets habitually trade on LC, others on CAD/DP; working against the local norm can cost an exporter the deal.
A very common structure in agro trade is a part advance with the balance against documents - for example, a percentage on order confirmation and the remainder when copy documents are presented or through a DP collection. The advance covers the exporter's procurement risk; the documentary balance reassures the buyer that the goods have actually shipped. The payment term also interacts with the delivery term: who controls the bill of lading, and when, depends on the Incoterm, which we cover in our guide to Incoterms for agro exports. To see where payment fits in the overall shipment cycle, read our step-by-step rice export procedure.
| Term | Risk to exporter | Risk to importer | Cost | Speed of payment |
|---|---|---|---|---|
| Advance (TT) | Lowest - paid before shipment | Highest - pays before seeing goods | Low (wire charges only) | Before shipment |
| Letter of credit | Low if documents comply; confirmation removes bank/country risk | Low - bank pays only against compliant documents | Highest (issuance, advising, confirmation fees) | At sight after document checking, or deferred under usance |
| DP (documents against payment) | Moderate - buyer may refuse; goods stranded at destination | Low - pays only when documents arrive | Moderate (collection charges) | When buyer pays to collect documents |
| DA (documents against acceptance) | High - goods released against a promise to pay | Lowest - receives goods before paying | Moderate (collection charges) | At maturity of the accepted bill |
Note that banking practice, exchange-control rules and documentation requirements vary by country and change over time, so confirm current requirements with your bank before finalising a contract.
Frequently asked questions
What is the safest payment term for an exporter?
Full advance payment is the safest term for an exporter because the money arrives before the goods ship. After that, a confirmed letter of credit at sight offers strong protection, since a bank undertakes to pay against compliant documents. DP carries more risk, and DA and open account carry the most.
What does "LC at sight" mean?
An LC at sight is a letter of credit under which the bank pays as soon as it has examined the presented documents and found them compliant with the credit terms. This contrasts with a usance LC, where payment is deferred to a later agreed date, such as a set number of days after the bill of lading date.
What happens under DP if the buyer refuses documents?
Under DP the collecting bank releases documents only against payment, so a buyer who refuses to pay never receives the documents and cannot clear the cargo. The goods, however, remain at the destination port at the exporter's risk and cost, so the exporter must find another buyer, ship the cargo back or, in the worst case, abandon it.
Is advance payment common in agro trade?
Partial advance payment is common in agro trade, especially for new trading relationships and smaller consignments. A typical structure is a percentage paid in advance to confirm the order, with the balance paid against scanned or original shipping documents. Full advance is more common for trial orders; established relationships often migrate to LC or DP terms.
Arcas Impex is an agro export house based in Belagavi, Karnataka, India, exporting rice, cashews, onions, green chillis and coffee to buyers worldwide. Explore our rice export range and the rest of our product portfolio.
Ready to discuss terms?
Tell us your product, quantity and preferred payment structure - we work with advance, LC and DP terms and will propose a workable arrangement.
Request a Quote