Payment & trade finance
Advance payment and deposit/balance structure
The buyer pays all or part of the price before shipment. A common structure is a 10–30 % deposit on signing and the balance against copies of shipping documents or on arrival. The deposit funds the seller’s raw materials and production; to protect it, the buyer may ask for an advance-payment guarantee, an escrow account or a verified supplier. A large prepayment to a new supplier is the highest-risk situation for fraud.
Bank guarantee (performance bond / advance-payment guarantee)
An undertaking by a bank to pay a stated amount when the beneficiary makes a demand. A performance bond secures the seller’s performance of the contract, typically for 5–10 % of the contract value; an advance-payment guarantee ensures the buyer’s deposit is refunded if the goods are not delivered. International deals usually use on-demand guarantees subject to the ICC’s URDG 758.
Confirmed letter of credit
A letter of credit to which a second bank, usually in the seller’s country (the confirming bank), adds its own payment undertaking on top of the issuing bank’s. It protects the seller when the issuing bank’s credit risk or the buyer country’s transfer and country risk is high. The confirmation fee is usually an annual percentage reflecting the risk, and the contract should say who pays it.
Country risk and transfer risk
The risk that money cannot reach the seller because of economic or political events in the buyer’s country – foreign-currency shortages, capital controls, sanctions, war or a moratorium – even when the buyer is willing and able to pay. OECD country risk classifications and sovereign credit ratings are used to gauge it. Sales to high-risk countries call for confirmed letters of credit, export credit insurance and payment in a strong currency.
Documents against acceptance (D/A) D/A
The deferred form of documentary collection: the buyer obtains the documents – and therefore the goods – by accepting a time draft (e.g. 60 days) and pays at maturity. The seller is left holding only the accepted draft and loses control of the goods, so the risk is close to open account; D/A is usually combined with credit insurance or a bank aval guaranteeing the draft.
Documents against payment / Cash against documents (D/P – CAD)
A collection method in which the seller sends the documents of title – above all the original bill of lading – through its bank to the buyer’s bank, which releases them only when the buyer pays; it is governed by URC 522. It is cheaper than a letter of credit, but no bank guarantees payment: if the buyer refuses the documents, the goods sit at the destination port and the seller faces demurrage, return freight or a distressed sale. Suitable for trusted, long-standing relationships.
Escrow account
An arrangement in which the buyer’s payment is held by an independent third party – a bank, notary or licensed payment institution – until agreed conditions are met, such as confirmation of delivery or a satisfactory inspection report. Once the condition is met the money goes to the seller; otherwise it returns to the buyer. Simpler and cheaper than a letter of credit, it bridges the trust gap in mid-sized deals between new parties. Always verify that the escrow provider is genuinely licensed and independent.
Factoring and forfaiting
Turning receivables from credit sales into cash before maturity by assigning them to a finance provider. Factoring is used for short-term, recurring invoice receivables, with or without recourse (in non-recourse factoring the factor takes the buyer’s default risk). Forfaiting is the non-recourse discounting of individual, usually larger and longer bank-backed claims such as accepted drafts under a letter of credit or avalised bills. Both ease the exporter’s working capital.
L/C discrepancy
A conflict between the documents presented and the credit terms, between documents themselves, or with UCP 600 – typos, late shipment or late presentation, missing endorsement, a different description of goods, or a bill of lading that is not “clean”. With discrepant documents the bank is released from its obligation and payment depends on the buyer waiving the discrepancy, which weakens the seller’s position. Checking the draft credit before issue and pre-checking documents are the best defences.
Letter of credit (L/C) L/C
A documentary payment method in which the buyer’s bank (issuing bank) undertakes to pay the seller against timely presentation of complying documents specified in the credit – bill of lading, invoice, certificate of analysis, certificate of origin and so on. Banks deal only with documents, not goods, so the credit terms must match the sales contract exactly and be achievable. It is the most common secure payment method for large raw material deals and first-time counterparties.
Open account O/A
The seller ships the goods and sends the documents directly to the buyer, who pays the invoice on a due date (e.g. 30–90 days). It is the most favourable method for the buyer and the riskiest for the seller, who manages the credit risk through trade credit insurance, factoring or a standby letter of credit. It is standard in long, trusted relationships and in some markets such as intra-EU trade.
Payment diversion fraud (business e-mail compromise) BEC
A fraud in which an attacker breaks into the seller’s or buyer’s e-mail, or writes from a look-alike domain, and at payment time announces that “our bank account has changed”, diverting the money to their own account. It is one of the costliest frauds in international trade and the money is often unrecoverable. Defences: confirm any IBAN change by voice on a previously known phone number, tie account changes to two-step verification inside the platform, watch for look-alike domains and start large payments with a small test transfer.
Standby letter of credit (SBLC)
Not a normal means of payment but a safety net: if the buyer fails to pay on open account or deferred terms, the seller draws on the SBLC with a statement of default and simple documents. It is governed by ISP98 or UCP 600 and works much like a bank guarantee. It is used in repeat shipments to avoid opening a separate credit for each lot. Beware: online offers of “leased SBLCs” or “SBLC monetisation” are a well-known fraud.
SWIFT MT103 (payment confirmation)
The standard SWIFT message used between banks for single customer cross-border transfers; it contains the sender, beneficiary, amount, value date and references, and is shared with the seller as proof that payment has been sent. Banks are migrating to the ISO 20022 format (pacs.008) from 2025, and the UETR tracking number shows where the payment is in the chain. Fake MT103 images are common in fraud, so a seller should confirm with its own bank that the funds have actually arrived before releasing goods.
Telegraphic transfer (T/T, wire transfer) T/T
Payment sent directly to the seller’s account through the interbank SWIFT network. In raw material trade it is used in patterns such as “30 % T/T in advance, 70 % T/T against copy of bill of lading”. It is fast and cheap but carries no bank guarantee: with advance payment the buyer bears the risk, with payment after shipment the seller does. Confirming the IBAN and beneficiary name through a known channel before paying is the key protection against “our bank account has changed” e-mails.
Trade credit insurance
Insurance of the seller’s receivables from credit sales against the buyer’s insolvency or protracted default (commercial risk) and against political risks such as war or transfer bans. The insurer sets a credit limit for each buyer and, after a loss, usually pays 85–95 % of the debt. Providers include export credit agencies such as Türk Eximbank and private insurers such as Allianz Trade, Coface and Atradius. A policy also makes bank financing easier and cheaper.
UCP 600 (Uniform Customs and Practice for Documentary Credits)
The ICC rules in force since 2007 that govern almost every letter of credit worldwide. They set the banks’ examination period (five banking days after presentation), the standard for compliant documents, the ±10 % tolerance implied by the word “about”, a ±5 % quantity tolerance for bulk goods, and the presentation period (no later than 21 days after shipment unless stated otherwise). The eUCP supplement covers electronic presentation.
Usance (deferred-payment) letter of credit
A letter of credit under which payment falls due at a set time after complying presentation – for example 90 or 180 days after the bill of lading date. It finances the buyer, who can process and sell the goods before paying, while the seller can obtain cash early by having the bank discount the accepted claim (forfaiting). The interest for the usance period and the discount cost should be built into the price.