Payment Terms in International Trade: LC, CAD and Open Account Compared
Every trade negotiation eventually lands on the same sentence: how do we pay. The payment term decides who carries the risk between production and delivery, and it moves real money in bank fees and cash flow. These are the four structures I negotiate most, and the situations where each one actually belongs.
The four standard structures
- Advance payment: the buyer pays before shipment, simplest and cheapest in fees, and the whole performance risk sits on the buyer
- Letter of credit: a bank pays against compliant documents, strong protection for both sides, priced in bank fees and strict document discipline
- Cash against documents: the buyer pays at their bank to receive shipping documents, lighter and cheaper than an LC but no bank guarantee of payment
- Open account: the seller ships and invoices with payment due later, cheapest to run and entirely dependent on trust or credit insurance
How the risk actually moves
Think of the terms as a slider. Advance payment puts all risk on the buyer, open account puts all of it on the seller, and LC and CAD sit between. An LC converts counterparty risk into document risk: the bank does not judge the goods, it judges the paperwork, which is why a misspelled vessel name can block payment on a perfect shipment.
CAD is the pragmatic middle for established relationships. The buyer cannot collect the goods without paying, the seller cannot be left waiting on an invoice, and bank costs stay modest. Its gap is a buyer who simply refuses the documents while your container stands in their port, so it works best where return logistics are realistic or demand is certain.
Matching the term to the relationship
First order with an unverified counterpart: split advance payment with a balance against shipping documents, or use an LC if the order size justifies the fees. Growing relationship with clean payment history: CAD keeps protection without LC bureaucracy. Mature relationship with volume: open account backed by credit insurance usually beats everything on total cost.
Whatever you choose, write the operational details into the contract: which documents trigger payment, how many days the buyer has, and which party pays each bank charge. Most payment disputes are not about bad faith. They are about two companies assuming different defaults.