Payment Terms in International Trade — LC, TT, DA, DP Explained
Payment Terms in International Trade — LC, TT, DA, DP Explained
TL;DR: Four payment instruments dominate international trade — Letter of Credit (LC, bank-guaranteed, governed by UCP 600), Telegraphic Transfer (TT, direct wire), Documents Against Payment (DP, bank-released documents on payment), Documents Against Acceptance (DA, deferred payment against accepted draft). For first orders with Indian exporters above USD 15,000, an LC at sight confirmed by an OECD-country bank is the gold standard — costs 0.5–1.5 percent and gives both buyer and seller a bank-mediated transaction with the pre-shipment inspection certificate as a release condition.
Why payment terms matter more than buyers think
International trade payments solve a fundamental asymmetry — the buyer wants to verify goods before paying; the seller wants to be paid before shipping. Every payment instrument is a different compromise between these two interests, with a different cost and a different risk profile. Get this choice wrong and you either expose yourself to fraud (100 percent TT advance) or you make the supplier's working capital impossible (open account with no security).
The framework: payment terms allocate risk (who's exposed if the other side defaults) and cost (bank fees, lost interest, FX exposure). Choose by order size, supplier maturity, and product type.
Letter of Credit (LC) — bank-guaranteed payment
An LC is a written undertaking by the buyer's bank (issuing bank) to pay a defined amount to the seller (beneficiary), against presentation of compliant documents within a defined period, governed by ICC's Uniform Customs and Practice for Documentary Credits — UCP 600 (2007 revision).
LC flow
- Buyer and seller sign Sales Contract specifying LC at sight, irrevocable, confirmed
- Buyer applies to issuing bank (their own bank) to open LC; bank may require collateral or margin
- Issuing bank sends LC via SWIFT MT700 to advising bank in India (usually one of HDFC, ICICI, Axis, SBI, Kotak)
- Advising bank delivers LC to seller (and confirms it if confirmed LC)
- Seller ships goods, gathers all required documents, presents to advising bank
- Advising bank verifies documents against LC terms; if compliant, sends to issuing bank
- Issuing bank verifies, debits buyer's account, pays seller via advising bank
Types of LC
- At Sight vs Usance — At sight pays immediately on compliant presentation; usance (time LC) pays after a deferred period (30/60/90/120 days).
- Irrevocable vs Revocable — Irrevocable cannot be amended without all parties' agreement (the only kind you should use; revocable is obsolete in practice).
- Confirmed vs Unconfirmed — Confirmed adds the advising bank's guarantee on top of the issuing bank's. Use confirmed if issuing bank is in a less-creditworthy jurisdiction. From India, confirmation is rarely needed if the issuing bank is a major OECD bank.
- Standby LC vs Documentary LC — Standby LC pays only on a default event (rare for trade). Documentary LC is the standard trade instrument.
- Transferable vs Non-transferable — Transferable allows the seller to assign a portion to a sub-supplier. Used when seller is an intermediary.
LC document set
A typical LC for an agri import from India requires:
| Document | Required count | Notes |
|---|---|---|
| Commercial Invoice | 3 originals + 3 copies | Match LC value and description exactly |
| Bill of Lading | Full set 3/3 originals + 3 copies | Clean on board, to order of issuing bank |
| Packing List | 1 original + 3 copies | Tally with invoice |
| Certificate of Origin | 1 original + 2 copies | Issued by approved Indian chamber |
| Insurance Certificate | 1 original + 2 copies | For CIF only; ICC(A) for 110% of CIF |
| Pre-Shipment Inspection Certificate | 1 original + 2 copies | SGS/BV/Intertek |
| Phytosanitary Certificate | 1 original + 2 copies | For plant products |
| Beneficiary Certificate | 1 original | Often required to certify advance sample sent |
LC pitfalls
- Discrepancies — minor mismatches trigger USD 50–125 discrepancy fees and risk LC rejection
- Last shipment date — if the BL date is after LC's last shipment date, LC is voided
- Latest negotiation date — documents must be presented within X days of BL date, usually 21
- Description mismatch — invoice description must match LC description exactly, character by character
Skilled exporters and confirming banks negotiate discrepancies through "discrepant under reserve" arrangements but this adds friction.
Telegraphic Transfer (TT) — direct bank wire
A TT is a SWIFT MT103 wire from buyer's bank to seller's bank. Fast (often same-day) and cheap (USD 20–60 per wire). No bank intermediation of risk — once funds clear, they are gone.
Common TT structures
| Structure | Buyer risk | Seller risk | Use case |
|---|---|---|---|
| 100% TT advance | Very high | None | Avoid except micro-orders |
| 30% TT advance + 70% TT against scanned BL | Moderate | Moderate | Small orders under USD 15,000 |
| 50% TT advance + 50% TT against scanned BL | Moderate | Lower | Some balance |
| 100% TT against scanned BL | Lower | High | Rare, requires trusted buyer |
| 100% TT against original BL courier | Lower | Moderate | More common than the previous |
The 30/70 structure is the working compromise for small first orders. Buyer fronts 30 percent (limited fraud exposure); seller ships and gets balance against BL scan (limited buyer default exposure).
When TT works, when it doesn't
TT is appropriate when:
- Order value below USD 15,000
- Supplier has shipped to other reputable buyers and the customs history is verifiable
- Pre-shipment inspection is contracted as a release condition for the 70 percent
- Marine insurance bound for 110 percent of CIF
TT is dangerous when:
- 100 percent advance to an unverified supplier
- Wire to a personal account or third-country account
- No PSI; no destination contact for the cargo
Documents Against Payment (DP / CAD)
Seller's bank sends shipping documents to buyer's bank with instructions: release documents only on full payment. Buyer can't take delivery without the documents (the BL is title), so DP gives the seller mid-tier security.
- Cheaper than LC — USD 50–150 fee versus 0.5–1.5 percent
- Less protective than LC — no bank guarantee of payment; buyer can simply refuse
- Goods are stranded at destination if buyer refuses; seller pays demurrage and arranges re-routing
Workable for medium-trust relationships where the supplier has at least one prior clean transaction with the buyer.
Documents Against Acceptance (DA)
Like DP but the documents release on the buyer accepting a time draft (a written promise to pay on a specific future date — 30/60/90 days from BL date). Buyer gets goods immediately and pays at draft maturity.
- High risk for seller — once buyer has goods and refuses to honour the draft, seller has only an unsecured claim
- Used only with long-trusted parties or large buyers with strong credit ratings
- Common in some FMCG, pharma, and finished-goods trade; rarely seen in agri commodities
Open Account
Seller ships and invoices; buyer pays on agreed credit terms (Net 30, Net 60, Net 90). Maximum risk for seller, maximum convenience for buyer. Used only between long-trusted partners with established credit relationship. Most Indian agri exporters do not offer open account to new buyers.
Cost comparison table
| Instrument | Combined cost | Buyer risk | Seller risk | Typical use |
|---|---|---|---|---|
| LC at sight, confirmed | 0.5–1.5% | Low | Low | First orders above USD 15,000 |
| LC at sight, unconfirmed | 0.3–0.8% | Low | Low-medium | Same as above, with strong issuing bank |
| Usance LC 90 days | 0.5–1.5% + discount | Low | Low | Buyer needs working capital |
| TT 30/70 | <0.2% | Medium | Medium | Small first orders |
| TT 100% advance | <0.1% | Very high | None | Micro-orders only |
| TT 100% against BL | <0.1% | Low | High | Rare, trusted buyer |
| DP / CAD | 0.1–0.3% | Medium | Medium | Mid-trust relationships |
| DA | 0.1–0.3% | Low | High | Long-trusted parties only |
| Open Account Net 60 | <0.1% | Low | Very high | Long-trusted partners |
RBI and FEMA rules for Indian exporters
Indian exporters operate under RBI Foreign Exchange Management Act (FEMA) rules. Key points:
- Export proceeds must be repatriated to India within nine months of shipment
- Exports above USD 15,000 require an EDPMS (Export Data Processing and Monitoring System) entry
- LC proceeds and TT proceeds are tracked through the exporter's Authorized Dealer Category-I bank
- An Indian exporter who fails to repatriate proceeds within 9 months can have IEC suspended
This is why Indian sellers push back on long-credit terms — they have a hard regulatory clock running.
Decision guide
| Order value (USD) | Supplier history | Recommended term |
|---|---|---|
| Under 5,000 | None | 100% TT against BL or 30/70 TT |
| 5,000 – 15,000 | None | 30% TT advance + 70% TT against scanned BL |
| 15,000 – 50,000 | None | LC at sight, irrevocable, confirmed |
| 15,000 – 50,000 | 2+ clean prior orders | LC at sight, unconfirmed; or DP |
| Above 50,000 | None | LC at sight, confirmed, with PSI as document |
| Above 50,000 | 5+ clean prior orders | LC at sight, unconfirmed; or DP at preference |
| Recurring volume | Long-trusted | Open account Net 30/60 |
Overseas Trade Hub (Tomar Impex Overseas LLP) accepts LC at sight (preferred for first orders above USD 15,000), TT 30/70, and TT 100 percent against BL. All terms negotiated transparently per the supplier verification guide. Email [email protected] for quotation and payment templates.
Frequently Asked Questions
What payment terms are used in international trade? Four mainstream instruments: Letter of Credit (LC), Telegraphic Transfer (TT), Documents Against Payment (DP), Documents Against Acceptance (DA). Plus Open Account for long-trusted parties.
Which payment term is safest for buyers? Letter of Credit at sight, irrevocable, confirmed by a major OECD bank. Funds release only against compliant document presentation, with PSI certificate as an LC document. Cost 0.5–1.5 percent of order value.
What is the difference between LC at sight and usance LC? LC at sight pays immediately on compliant presentation. Usance LC pays after a deferred period (30/60/90/120 days) — buyer accepts a time draft and pays at maturity.
What documents are required under a Letter of Credit? Commercial Invoice, full set BL, Packing List, Certificate of Origin, Insurance Certificate (CIF only), Pre-Shipment Inspection certificate, Phytosanitary Certificate, sometimes Beneficiary Certificate. Every document must match LC terms exactly.
What is TT payment in international trade? Telegraphic Transfer — direct bank wire. Common structures: 100% advance (risky), 30/70 (common for small orders), 100% against BL. Fast and cheap but no bank guarantee.
What is DP and how does it work? Documents Against Payment — seller's bank sends shipping documents to buyer's bank with release only on payment. Cheaper than LC, less protective. Workable for medium-trust relationships.
What is DA and when is it used? Documents Against Acceptance — documents release when buyer accepts a time draft (30/60/90 days). High risk for seller; used only with long-trusted parties or strong-credit buyers.
How much does a Letter of Credit cost? Combined 0.5–1.5 percent of LC value. Breakdown: issuance fee (0.125–0.5%), confirmation fee (0.25–1% if confirmed), discrepancy fees (USD 50–125 each), courier (USD 30–80), amendments (USD 50–150 each).