How you pay your overseas supplier affects your risk, cash flow, and negotiating power. This guide explains the main payment methods used in international trade and helps you choose the right option.
Payment Methods Compared
| Method | Risk to Buyer | Risk to Seller | Best For |
|---|---|---|---|
| Advance payment | Highest | Lowest | Small orders, new suppliers (for buyer protection, see L/C) |
| Letter of Credit (L/C) | Low | Low | Large orders, untrusted suppliers |
| Documentary collection (D/P) | Medium | Medium | Established relationships |
| Open account | Lowest | Highest | Trusted, long-term suppliers |
1. Advance Payment (T/T — Telegraphic Transfer)
How it works: You pay the supplier before they ship the goods.
Common structure:
- 30% deposit on order placement
- 70% balance before shipping
Pros:
- Simplest method
- Suppliers offer best prices
Cons:
- You carry all the risk
- No protection if goods are substandard
- Cash committed before goods arrive
Best for: Small orders where the risk is manageable. Common with Chinese suppliers.
2. Letter of Credit (L/C)
How it works: Your bank guarantees payment to the supplier's bank, provided the supplier presents correct shipping documents.
Process:
- You apply for L/C at your bank
- Bank issues L/C to supplier's bank
- Supplier ships goods and presents documents
- Banks verify documents
- Payment released to supplier
- You receive documents to clear cargo
Pros:
- Protection for both parties
- Payment only on correct documents
- Bank-guaranteed
Cons:
- Bank charges (0.5-2% of L/C value)
- Complex documentation
- Slow process
Best for: Large orders, new suppliers, high-value commodities.
3. Documentary Collection (D/P or D/A)
How it works:
- D/P (Documents against Payment): Bank releases shipping documents to you only when you pay
- D/A (Documents against Acceptance): Bank releases documents when you accept a bill of exchange (promise to pay later)
Pros:
- Cheaper than L/C
- Some protection for both parties
Cons:
- Less secure than L/C
- Bank doesn't guarantee payment
4. Open Account
How it works: Supplier ships goods and invoices you. You pay within agreed terms (30, 60, or 90 days after shipment).
Pros:
- Best cash flow — pay after receiving goods
- Simple administration
Cons:
- Supplier carries all risk
- Only offered to trusted buyers
Impact on Customs Clearance
Your payment method affects your customs clearance documents:
- Invoice values must match the declared customs value
- L/C documents are checked by banks, so tend to be accurate
- Provisional payments may require provisional customs duty calculations
V & S Freight ensures your customs documentation aligns with your payment terms. Get clearing assistance →