You closed a deal with an overseas buyer or supplier. Now comes the harder question: how does the money actually move, and who carries the risk if the other side fails to pay or fails to ship? This article compares the two most common cross-border payment structures, a letter of credit and open account, so you can pick the one that protects your cash without killing the deal.
What each payment method actually does
These terms sit on a spectrum of trust. On one end, the exporter gets paid before anything ships. On the other, the exporter ships first and hopes to get paid. Letters of credit and open account sit at opposite practical ends of that spectrum.
Letter of credit (LC)
An LC is a bank’s written promise to pay the seller once the seller presents documents that match the LC’s terms exactly. The buyer’s bank issues it; the seller’s bank usually advises or confirms it. The key point: payment depends on documents, not on the goods themselves. If the paperwork conforms, the bank pays even if the buyer later complains.
Open account
Open account means the seller ships the goods and invoices the buyer, who pays later, often 30, 60, or 90 days after shipment or delivery. There is no bank guarantee. The seller extends credit and absorbs the risk of non-payment.
Who carries the risk, and what it costs
| Factor | Letter of credit | Open account |
| Risk to seller | Low (bank pays on conforming docs) | High (relies on buyer paying) |
| Risk to buyer | Moderate (pays on docs, not inspection) | Low (pays after receiving goods) |
| Cost | Higher (issuance, advising, confirmation fees) | Low (mainly your own credit risk) |
| Cash flow | Buyer’s line may be tied up | Buyer keeps cash longer |
| Speed and effort | Slower, document-heavy | Fast, simple |
An LC shifts the seller’s risk from the buyer to a bank, which is why sellers like it. But it costs money, ties up the buyer’s credit line, and demands flawless documents. Open account is cheap and fast, but the seller becomes an unsecured lender.
When to apply each one
Choose an LC when the relationship is new, the amount is large, the buyer’s country carries payment or political risk, or you simply cannot afford a default. Consider confirming the LC through a bank in your own country when you doubt the issuing bank or its jurisdiction.
Choose open account when you have a proven track record with the counterparty, the order sizes are manageable, and competitive pressure demands flexible terms. In many mature trade lanes, buyers expect open account and will walk away from an LC request.
Between these extremes sit middle options worth knowing: documentary collection (cheaper than an LC, but the bank does not guarantee payment) and partial deposits, such as 30 percent down and 70 percent against shipping documents. These often solve the trust gap without the full cost of an LC.
A real scenario
A furniture importer placed a first order with a new factory abroad. The factory wanted 100 percent payment before production. The importer refused, worried the goods would never arrive. They settled on an irrevocable LC payable against a full set of shipping documents including the bill of lading and inspection certificate. The factory got a bank-backed promise; the importer avoided paying for goods that did not exist. On the third repeat order, both sides trusted each other enough to move to 30 percent deposit and open account for the balance, cutting bank fees and speeding up the deal.
Common mistakes and how to fix them
Most LC losses are self-inflicted through document errors, not fraud. Fix these before they cost you.
- Treating an LC as a guarantee of goods. It guarantees payment against documents only. Fix: pair it with a pre-shipment inspection clause.
- Presenting documents that do not match the LC word for word. Banks reject on tiny discrepancies. Fix: check spelling, quantities, dates, and the exact wording before shipping.
- Using open account with an unvetted buyer. Fix: run a credit check and consider trade credit insurance.
- Ignoring the LC expiry and presentation deadlines. Fix: build a calendar backward from the shipment date.
- Assuming the cheapest method is best. Fix: price the risk, not just the fee.
Action steps before you commit
- Assess the counterparty: new or proven, and in which country.
- Size the exposure: what happens if this single order is never paid?
- Match the method to the risk using the table above.
- If using an LC, read every term and confirm you can meet each document requirement.
- If using open account, set a credit limit and consider insurance.
- Get the agreed terms in the sales contract, not just an email.
Conclusion and next step
Payment terms are risk management, not paperwork. Start by scoring the counterparty and the exposure, then choose the lightest method that still protects you. Your next step: before the next order, write down which method you will use and why, and put it in the contract.
FAQ
Is an irrevocable letter of credit safe for the seller?
It is strong protection because it cannot be changed or cancelled without all parties’ consent. It is only as safe as the issuing bank, though. If that bank or its country worries you, ask a bank in your own country to confirm the LC.
Can the buyer refuse to pay under an LC if the goods are defective?
Generally no. LC payment depends on conforming documents, not the condition of the goods. That is why buyers should require an independent inspection certificate as a listed document.
What is the difference between an LC and documentary collection?
With documentary collection, banks handle the documents and payment but do not guarantee payment. It is cheaper than an LC but offers the seller far less protection.
How do I move a buyer from LC to open account?
Build history. After several on-time, trouble-free transactions, propose a hybrid such as a deposit plus open account balance, then move to full open account once trust is established.
References
International Chamber of Commerce (ICC), Uniform Customs and Practice for Documentary Credits (UCP 600). These are the widely recognized international rules governing letters of credit.