International Trade Payment Methods: Advantages, Risks and Strategic Considerations for Vietnamese Exporters.
In international trade, an attractive selling price and a substantial order do not necessarily translate into a successful transaction if the exporter cannot collect payment on time. The choice of payment method determines not only when payment is received, but also how the parties allocate risk, how goods and shipping documents are controlled, how much working capital is required, and how effectively the exporter can expand into overseas markets.
For Vietnamese exporters, the central challenge is to balance two objectives: securing payment and maintaining commercial competitiveness. This becomes particularly important when dealing with new buyers, overseas distributors, seasonal orders, or counterparties requesting deferred payment terms.
No single payment method is optimal for every transaction. An advance payment may be suitable for an initial order or a buyer whose creditworthiness has not been established. A documentary letter of credit may provide a bank undertaking subject to specified documentary conditions. Documentary collection may offer a less costly alternative for established trading relationships, while open account terms may be commercially necessary in markets where buyers routinely expect trade credit. Each option should be assessed against the buyer’s financial standing, country risk, the nature of the goods, and the consequences of non-payment.
1. Common Payment Methods in International Sales of Goods
1.1. Telegraphic Transfer in Advance (T/T in Advance)
Under an advance payment arrangement, the buyer transfers all or part of the purchase price to the exporter before the goods are shipped or before the agreed shipping documents are released. Payment is generally made through the banking system in accordance with the account details and payment instructions agreed by the parties.
Advantages for exporters
- Significantly reduces the risk of non-payment after shipment where the agreed amount has been irrevocably credited to the exporter’s account.
- Improves cash flow and reduces the need to finance raw materials, production and order preparation.
- Generally involves a simpler process and lower transaction costs than a documentary letter of credit.
- May be particularly suitable for custom-made goods, products that are difficult to resell, initial orders or buyers whose creditworthiness remains uncertain.
Risks and limitations
- Buyers may be reluctant to pay the entire purchase price before receiving evidence that the goods have been manufactured or shipped.
- Requiring 100% advance payment may reduce the exporter’s competitiveness if competing suppliers offer deposits or deferred payment terms.
- Exporters must still manage foreign exchange exposure, bank charges, payment fraud and fraudulent changes to beneficiary account details.
- If the buyer is entitled to a refund because the exporter fails to perform or deliver on time, disputes may arise over the deposit, interest and damages.
Recommendations
Exporters should consider advance payment for new customers, trial orders, customised goods or transactions involving elevated buyer or country risk. Where the buyer will not accept full advance payment, the parties may negotiate a hybrid structure, such as a deposit upon contract signing followed by payment of the balance before shipment or upon presentation of agreed shipping documents.
The deposit percentage should reflect the cost of raw materials, the degree of product customisation, resale prospects and the potential costs of cancellation. A single deposit percentage should not be applied indiscriminately to all products or transactions.
1.2. Documentary Letter of Credit (L/C)
A documentary letter of credit is an undertaking issued by a bank to pay the beneficiary, subject to the terms and conditions of the credit and the presentation of a complying set of documents. Where the credit incorporates the International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits (UCP 600), that rule set governs the relevant documentary credit.
A letter of credit may provide for payment at sight, deferred payment, acceptance of a draft or negotiation, depending on its structure.
Advantages for exporters
- Provides a basis for seeking payment under a bank undertaking when the exporter makes a complying presentation, rather than relying solely on the buyer’s promise to pay.
- Can facilitate transactions with new buyers or where the exporter lacks sufficient information to assess the buyer’s creditworthiness.
- A deferred-payment letter of credit may accommodate the buyer’s cash-flow requirements while providing the exporter with a bank undertaking, subject to the credit’s terms.
- Where issuing-bank or country risk is a concern, the exporter may consider requiring confirmation by another bank, subject to that bank’s agreement and the parties’ allocation of the associated costs.
Risks and limitations
- Issuance, advising, confirmation, amendment and documentary-handling fees may be higher than those associated with simpler payment methods.
- A discrepancy between the documents presented and the credit’s requirements may result in refusal of payment or a request for the buyer to accept the discrepancy.
- A bank undertaking does not guarantee the quality of the goods. Under UCP 600, banks deal with documents rather than the goods, services or performance to which those documents relate.
- If the issuing bank has weak creditworthiness, or confirmation is not obtained when necessary, the exporter may remain exposed to bank and country risks.
- Complex or impracticable documentary requirements, particularly those involving documents controlled by the buyer, may make it difficult for the exporter to present complying documents.
Recommendations
A letter of credit is worth considering for high-value contracts, new buyers, transactions involving elevated credit risk, or sales where the parties require a clearly defined documentary payment mechanism.
Before shipment, the exporter should ask its bank to review the draft credit and verify the parties’ names, amount, expiry date, presentation period, ports of shipment and destination, transport conditions, required documents and payment terms. Conditions that cannot reasonably be satisfied or are outside the exporter’s control should be negotiated before production or shipment begins.
For higher-risk transactions, the exporter should assess the issuing bank, whether confirmation is necessary, and the total cost of the proposed credit structure. A letter of credit should not be treated as an absolute guarantee of payment under all circumstances.
1.3. Documentary Collection
Under documentary collection, the exporter entrusts documents to its bank for transmission to a collecting bank in the buyer’s country, together with instructions governing collection and release of the documents. The banks act as intermediaries in handling the collection but do not ordinarily undertake to pay in place of the buyer.
Two common forms are:
- Documents against Payment (D/P): The documents are released in accordance with the collection instructions against payment.
- Documents against Acceptance (D/A): The documents are released in accordance with the collection instructions against the buyer’s acceptance of an obligation to pay at a future maturity date.
Where the collection instruction incorporates the International Chamber of Commerce’s Uniform Rules for Collections (URC 522), those rules may govern the collection.
Advantages
- Generally less costly and procedurally simpler than a letter of credit.
- Banks assist with the transmission of documents and implementation of the collection instructions.
- May suit buyers with an established payment record operating in relatively stable markets.
- D/P can preserve a degree of control over the release of documents, provided that the transport documents and delivery arrangements allow such control to be exercised in practice.
Risks and limitations
- The collecting bank does not guarantee that the buyer will pay.
- Under D/P, the buyer may refuse to pay or take delivery, leaving the exporter to arrange resale, storage, re-export or return shipment.
- Under D/A, the exporter may release the documents before receiving payment, leaving the exporter exposed to the risk that the buyer fails to pay at maturity.
- The degree of practical control depends on the type of transport document, how the bill of lading is issued, the applicable law and whether the buyer can obtain or clear the goods without the documents being controlled through the collection arrangement.
Recommendations
D/P may be a useful intermediate option for an established buyer where the exporter wishes to reduce costs compared with a letter of credit. D/A should be considered only after assessing the buyer’s creditworthiness and the exporter’s willingness and capacity to extend trade credit.
Before choosing documentary collection, the exporter should confirm with its bank the collection instructions, procedures for dealing with a refusal to pay or accept documents, notification requirements, applicable fees and arrangements for goods that remain uncollected. Collection through a bank should not be mistaken for a bank guarantee of payment.
1.4. Open Account
Under an open account arrangement, the exporter ships the goods and issues an invoice before payment becomes due. The buyer pays within an agreed credit period, commonly 30, 60 or 90 days, or in accordance with another agreed payment schedule.
Advantages
- Makes the exporter’s offer more attractive and can support long-term commercial relationships.
- Allows the buyer to manage cash flow and may facilitate importation, distribution and resale.
- Can provide a competitive advantage when competing suppliers offer trade credit.
- May be appropriate for stable supply chains, repeat orders and buyers with an established financial and payment record.
Risks and limitations
- The exporter bears the risk of late payment, insolvency or refusal to pay.
- The exporter must finance production, shipment and the period before collection.
- Non-payment may result from economic deterioration, transfer restrictions, policy changes, quality disputes or the buyer’s inability to meet its obligations.
- Cross-border debt recovery can be time-consuming and costly, particularly where the contract does not clearly specify dispute resolution procedures and the competent forum.
Recommendations
Open account terms should generally be extended only after the buyer has been assessed and a credit limit and receivables-monitoring process have been established. Exporters may begin with a shorter credit period and a lower limit, adjusting them as the buyer demonstrates a satisfactory payment record.
Risk mitigation measures may include export credit insurance, factoring, a standby letter of credit or other appropriate security. Credit insurance may cover specified commercial and political risks within the scope of the policy, but coverage is subject to exclusions, deductibles, limits and other conditions. Exporters must comply with the insurer’s underwriting, notification and overdue-debt procedures.
1.5. Consignment
Under a consignment arrangement, the exporter ships goods to an overseas distributor or agent for storage and sale. Payment is generally remitted after the goods have been sold to end customers, in accordance with the parties’ agreement.
Advantages
- Makes goods available in the destination market and can shorten delivery times for end customers.
- May help the exporter develop distribution channels and assess market demand.
- Allows the distributor to sell the goods without necessarily paying for the entire inventory upon receipt.
Risks and limitations
- The exporter may bear inventory risk, non-payment risk and the risk that the distributor does not accurately report sales.
- Goods held overseas may be damaged, lost, depreciated or difficult to recover in a dispute.
- Retaining title on paper does not automatically ensure that the exporter can recover the goods in every circumstance. The effectiveness of title retention against third parties and the procedures for recovering assets must be assessed under the relevant law.
Recommendations
Consignment should be considered only after careful due diligence on the distributor and a written agreement clearly addressing ownership, insurance, warehouse management, stocktaking, sales reporting, payment triggers, inspection rights, recovery of unsold goods and the treatment of inventory that cannot be sold.
Exporters should consider limiting the initial consignment quantity and implementing regular reconciliation and reporting mechanisms.
2. Comparative Assessment from the Exporter’s Perspective
| Payment method | Protection against non-payment | Costs and procedures | Potentially suitable circumstances |
| T/T in advance | High if the agreed funds have been received before shipment | Generally simple and relatively low-cost | New buyers, customised goods, or transactions involving elevated risk |
| Sight L/C | Bank undertaking subject to a complying presentation; documentary and bank risks remain | Higher costs and stricter documentary management | High-value contracts, new buyers or transactions requiring a bank payment undertaking |
| Deferred-payment L/C | May provide a bank undertaking, subject to the credit; payment is received at a later date | Higher costs; bank and maturity risks must be assessed | Buyers requiring credit while the exporter seeks a bank undertaking |
| D/P | Moderate; no bank payment undertaking in the ordinary collection structure | Generally less costly than an L/C | Assessed buyers, resaleable goods and transport documents that support practical control |
| D/A | Lower than D/P because documents may be released before payment | Generally less costly than an L/C | Buyers with good credit and exporters willing to accept deferred-payment risk |
| Open account | Low without additional security or risk mitigation | Simple payment process, but financing and collection costs may arise | Established buyers in competitive markets with credit limits and appropriate safeguards |
| Consignment | Low without supplementary safeguards | Potentially significant inventory, insurance, administration and recovery costs | Exporters seeking to develop distribution while retaining the capacity to manage overseas inventory |
This comparison is indicative rather than absolute. A letter of credit may reduce buyer-credit risk but still expose the exporter to issuing-bank risk, documentary discrepancies or impracticable credit terms. Conversely, open account terms may be commercially reasonable where the buyer has a strong financial record and the receivable is insured or financed through an appropriate arrangement.
3. Selecting Payment Methods for Different Export Markets
Exporters should not select a payment method solely by reference to the buyer’s country or region. Within the same market, the risk presented by a financially established corporate group may differ substantially from that of a newly incorporated company, an intermediary or a buyer whose financial information cannot be independently verified.
A more practical approach is to classify transactions according to risk exposure and commercial requirements.
3.1. New Markets or Buyers Whose Creditworthiness Is Difficult to Verify
Options to consider:
Full or substantial advance payment; a sight L/C issued by a suitably creditworthy bank; or a confirmed L/C where the assessed bank or country risk warrants confirmation.
Rationale:
The exporter has limited reliable information about the buyer’s payment history and ability to perform. Accepting open account or D/A terms at the outset may expose the exporter to credit risk before the counterparty has established a satisfactory record.
Practical recommendations:
Verify the buyer’s corporate registration, authorised representatives, operating address, bank details and available financial or credit information. Where appropriate, conduct independent verification through banks, reputable due diligence providers or reliable commercial references. For high-value orders, consider direct verification and a more structured payment arrangement.
3.2. Highly Competitive Markets Where Buyers Commonly Require Credit
Options to consider:
Deferred-payment L/Cs, D/P for assessed buyers, or open account terms supported by credit limits, export credit insurance, factoring or a standby L/C.
Rationale:
Deferred payment may be a commercial requirement for entering a distribution network or maintaining a position in a supply chain. However, granting credit without quantifying financing costs and default risk may increase sales while weakening profitability and cash flow.
Practical recommendations:
Price the transaction to reflect financing costs, insurance premiums and receivables administration. Set maximum credit limits for individual buyers and establish clear procedures for suspending further shipments when exposure exceeds agreed limits or material overdue debts arise. Credit insurance should be arranged before the insured risk materialises, rather than after the buyer has already become unable to pay.
3.3. Stable Markets and Established Trading Relationships
Options to consider:
D/P or open account terms, provided that the buyer’s payment history and credit profile support the decision.
Rationale:
For buyers with a satisfactory track record, a simpler payment method may reduce transaction costs, documentary processing time and administrative burden.
Practical recommendations:
Review the buyer’s financial standing periodically. A good payment history should not be treated as a guarantee of future performance. A significant increase in order value, a longer credit period or a deterioration in economic conditions may justify a reassessment of the credit limit and security package.
3.4. Customised, Perishable or Difficult-to-Resell Goods
Options to consider:
Deposits combined with payment before shipment, an L/C with practicable documentary conditions, or milestone-based payment arrangements tied to identifiable stages of production and delivery.
Rationale:
If the buyer refuses to take delivery, the exporter may incur not only the loss of the purchase price but also storage, re-export, discounting or disposal costs.
Practical recommendations:
Link payments to verifiable milestones and clearly define cancellation rights, responsibility for procured materials, work-in-progress costs, storage charges and the treatment of rejected or uncollected goods. Consignment arrangements require additional safeguards over insurance and inventory control.
3.5. High-Value Transactions or Long-Term Supply Arrangements
Options to consider:
A confirmed L/C where justified; a deferred-payment L/C issued by a creditworthy bank; payment by instalments or shipment lots; or open account terms supported by credit insurance and receivables financing.
Rationale:
A substantial outstanding receivable may materially affect working capital and the exporter’s ability to continue production. The risk assessment should cover not only the buyer’s ability to pay but also transfer restrictions, bank exposure, political risk and concentration of revenue in a single customer.
Practical recommendations:
Establish contingency arrangements for delayed payment, limit excessive dependence on a single buyer, and consider dividing shipments and payments into stages to avoid exposing the entire contract value to risk at one time.
4. Contractual Terms Exporters Should Address During Negotiations
The payment method is only one component of the transaction structure. To protect the exporter’s ability to collect the purchase price, the contract should address the following matters consistently.
First, when payment becomes due. Specify whether payment is required before or after shipment, the event from which the payment period is calculated, the conditions for completion and the treatment of bank holidays or payment delays.
Second, documentary requirements. The list of required documents should be clear, practicable and consistent with the exporter’s actual export procedures. Under an L/C, avoid conditions dependent on the buyer’s confirmation or third-party documents that the exporter cannot reasonably control. Under UCP 600, banks examine documents; they do not replace the process for resolving disputes concerning the quality of goods or performance of the underlying sales contract.
Third, allocation of banking and transfer charges. Specify which party bears the issuing, advising, confirming, amendment, transfer and intermediary bank charges, and clarify the amount the exporter is expected to receive net of charges.
Fourth, late-payment interest and remedies for breach. Define the applicable interest calculation, the date from which interest accrues, the exporter’s right to suspend further shipments or terminate the contract, and the allocation of damages to the extent permitted by the applicable law.
Fifth, governing law and dispute resolution. Identify the governing law, dispute resolution mechanism, seat or venue where relevant, and language of the proceedings. If the United Nations Convention on Contracts for the International Sale of Goods (CISG) applies, the parties should consider its role alongside the domestic law applicable to matters outside the Convention’s scope.
Sixth, verification of changes to payment details. Any notice changing a bank account received by email or through an electronic platform should be verified through an independent channel agreed in advance. An exporter should not transfer funds solely on the basis of an email purporting to change payment details, even if the email appears to come from a familiar address.
5. A Practical Decision-Making Process for Exporters
Before entering into a transaction, exporters may adopt the following six-step process:
1. Assess the buyer: Verify its legal status, financial capacity, payment history and the authority of the persons entering into the contract.
2. Assess country and bank risks: Consider transfer restrictions, foreign exchange controls, political risk and the creditworthiness of the banks involved.
3. Classify the goods: Determine whether the goods can be resold, their shelf life, the cost of customised production and the consequences of refusal to take delivery.
4. Define acceptable risk exposure: Estimate the receivable amount, its potential effect on cash flow and the maximum loss the business can absorb.
5. Select the payment method and supporting safeguards: Consider deposits, L/Cs, L/C confirmation, credit insurance, factoring, standby L/Cs or other appropriate security.
6. Implement monitoring procedures: Track payment deadlines, documentary discrepancies, overdue receivables and shipment-suspension triggers; periodically reassess credit limits.
6. Conclusion
For Vietnamese exporters, selecting an effective payment method is not simply a matter of choosing the lowest-cost option or the method perceived to be the safest. The decision should reflect the reliability of information about the buyer, market risks, the value and characteristics of the goods, working-capital requirements and the exporter’s commercial objectives.
T/T in advance may be suitable where cash-flow protection is the priority. An L/C may be appropriate where payment is to be supported by a bank undertaking subject to documentary conditions. D/P can serve as an intermediate option for assessed buyers, while open account terms may enhance competitiveness when supported by credit limits, insurance or receivables financing. Consignment requires particular caution because the exporter may bear both inventory risk and non-payment risk.
Most importantly, an exporter should not merely state in the contract that payment will be made by “T/T”, “L/C” or “D/P”. The contract should clearly specify the conditions for payment, documentary requirements, deadlines, charges, consequences of breach and arrangements for dealing with non-payment.
A sound payment structure should enable an exporter not only to sell its goods, but also to establish a practical and legally enforceable basis for collecting the purchase price.
References
[1] ICC Academy, Export Financing: A Comprehensive Guide, https://academy.iccwbo.org/trade-finance/article/what-is-export-financing/
[2] International Trade Administration, U.S. Department of Commerce, Methods of Payment, https://www.trade.gov/methods-payment
[3] International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits (UCP 600), particularly Articles 4–5 on the independence of credits and the principle that banks deal with documents, https://library.iccwbo.org/content/tfb/RULES/tfb-ucp600-rules.htm
[4] International Trade Administration, Documentary Collections, https://www.trade.gov/documentary-collections
[5] International Trade Administration, Export Credit Insurance, https://www.trade.gov/export-credit-insurance
[6] International Trade Administration, The Trade Finance Guide, https://www.trade.gov/report/trade-finance-guide
Disclaimer
This article is intended for general informational purposes only and reflects the personal views of its author. It does not constitute legal advice from the author or BFSC Law LLC in relation to any specific factual situation.
The appropriate payment method and any related security measures must be selected following a case-specific assessment of the transaction, contractual terms, foreign exchange regulations, banking requirements, applicable laws in the relevant jurisdictions and other material circumstances. Such assessment should be undertaken with the assistance of lawyers and other professionals experienced in international trade and cross-border payment arrangements.
BFSC Law LLC cautions readers against relying on the information contained in this article as legal advice for any particular matter.
For legal advice concerning international sale of goods contracts or international payment methods, please contact the Secretariat of BFSC Law LLC in Hanoi, Vietnam, at (+84-24) 7108 2688 or [email protected].
For comments or enquiries specifically relating to this article, please contact the author: Phan Quang Chung | E-mail: [email protected].