Why the payment method matters
In international trade, the buyer and seller are often in different countries and may not know each other well. The payment method is how the two sides balance the risk of "pay before you receive the goods" against "ship before you receive the money". Choosing the wrong method can expose either side to non-payment or non-delivery.
Common settlement methods
| Method | Code | How it works and who it tends to favor |
|---|---|---|
| Telegraphic Transfer | T/T | The buyer's bank wires funds electronically to the seller. Fast and the most common method. Advance T/T favors the seller; T/T after shipment favors the buyer. |
| Mail Transfer | M/T | The bank sends a payment order by mail. Slower than T/T and now rarely used. |
| Banker's Demand Draft | D/D | The buyer buys a bank draft and sends it to the seller, who presents it to collect payment. |
| Documents against Payment | D/P | The bank releases the shipping documents only after the buyer pays. Tends to favor the seller, because the buyer cannot collect the goods without paying. |
| Documents against Acceptance | D/A | The bank releases documents once the buyer accepts (agrees to pay on a future date). More buyer-friendly, with higher risk for the seller. |
| Letter of Credit | L/C | The buyer's bank guarantees payment to the seller against compliant documents. Balanced protection for both sides, but the documents must match the credit exactly. |
| Ship first, settle later | Open account | Goods are shipped before payment is settled. Favors the buyer and carries higher risk for the seller. |
| Settle first, ship later | Payment in advance | Payment is received before goods are shipped. Favors the seller and carries higher risk for the buyer. |
| Other | — | Other arrangements agreed between the parties in the sales contract. |
How to choose
- New or unverified counterparty: lean toward L/C or advance payment for the seller.
- Long-term, trusted relationship: T/T or open account can reduce cost and paperwork.
- Large or high-risk shipments: L/C gives both sides bank-backed protection.
- Always match the payment method to the agreed Incoterms and document plan.
Important note
This page is a general reference only and is not financial, banking, or legal advice. Confirm the exact terms, fees, and document requirements with your bank, trade finance adviser, or the buyer before agreeing payment terms.