In every international payment, someone agrees to wait and someone agrees to take a risk. Choosing the method means deciding who bears that risk and at what cost. No method is best in the abstract; it depends on trust, value and country.
The four main methods
Advance payment
The buyer pays before shipment. It is the safest for the seller and the riskiest for the buyer, who depends on the supplier delivering. It makes sense for small orders, for new suppliers of verified reputation, or when the buyer has little bargaining power.
Documentary letter of credit
The buyer's bank undertakes to pay the seller against compliant documents. It follows the International Chamber of Commerce's Uniform Customs and Practice (UCP 600). The credit is independent of the sales contract: the bank pays or refuses on the documents, not on the quality of the goods. The bank has up to five banking days to examine the documents and, if it finds discrepancies, to give notice of refusal. It is secure but has a cost and demands rigour: a wrong date or description can block payment.
Documentary collection
The seller sends the documents to its bank, which forwards them to the buyer's bank. The buyer's bank releases them only against payment (D/P) or acceptance of a bill of exchange (D/A). It follows the Uniform Rules for Collections (URC 522), not UCP 600, and the bank gives no undertaking to pay. It protects more than open account, but less than a letter of credit.
Open account
The seller ships and allows the buyer time to pay, with no bank guarantee. It is the most favourable to the buyer and the norm between partners who know each other. For the seller the risk is non-payment, which can be covered by credit insurance.
How to decide
- New relationship, high value: letter of credit, or part advance payment and the rest against documents.
- Established relationship: open account or documentary collection, with a short term.
- Country with foreign-exchange restrictions: first confirm how and when the bank releases foreign currency. In Angola, access to foreign currency for imports should be settled before the contract is signed, not after the goods have shipped.
Precautions common to all
The description of the goods, the Incoterm and the dates must match across all documents: contract, invoice, packing list, bill of lading and, if there is one, the letter of credit. Small differences are the commonest reason for late or refused payments.