Written by Aaron Koh, General Manager - Payments
Cross-border payments, business accounts, FX — these things look straightforward until you're actually managing them at scale. I've spent 14 years in the payments industry across Asia helping businesses get it right.
Last reviewed by April 2026.
Key Takeaways
Cash in advance carries zero payment risk for the seller but puts all risk on the buyer. It suits first-time buyers and small transactions.
A letter of credit (LC) is the most secure formal instrument for both sides: a bank guarantees payment once the shipping documents comply. Issuing bank commission typically runs 0.5–1.5% of the transaction value, with additional document handling fees of USD 50–300 per set.
Open account is common in established trade relationships — but the seller carries full payment risk for the entire payment period (often 30–90 days).
FX timing risk applies across all five methods. A 90-day open account gap between invoice and payment can produce a meaningful rate swing. Multi-currency accounts with FX forward contracts are the practical fix.
International trade relies on five main payment methods: cash in advance, letters of credit, documentary collections, open account, and consignment. Each distributes risk differently between buyer and seller — the same transaction looks very different depending on which side of it you’re on.
You’ve just agreed terms with a new buyer in Europe. They want net 30 — pay after delivery. Your instinct is to ask for a wire transfer upfront before you ship. Both positions make sense. Both could lose you the deal.
Ask for too much protection, and the buyer goes to a competitor who’s more flexible. Accept too little, and you’re carrying all the risk on a relationship you haven’t tested yet. The choice of payment method is where that tension gets resolved.
This guide covers each method in detail, with a decision framework to match the right method to your buyer relationship and deal size. It also covers how each method exposes you to currency risk, and what to do about it. The regulatory standards, particularly on letters of credit, reference ICC UCP 600 and International Trade Administration guidance.
The 5 Payment Methods at a Glance
Before going through each method in detail, here’s how they compare across the dimensions that matter most:
| Method | Best For | FX Timing Exposure |
|---|---|---|
| Cash in Advance | New buyers, small transactions | Low — payment received before shipment |
| Letter of Credit | Large or first-time transactions needing mutual protection | Medium — LC currency set at issuance, payment weeks later |
| Documentary Collection | Established relationships with some trust | Medium — D/A creates a 30–90 day gap between shipment and payment |
| Open Account | Long-term, trusted buyer relationships | High — 30–90 day gap between invoice and payment |
| Consignment | Established distributors with a proven track record only | Very High — no defined payment date until goods sell |
The risk levels above reflect the seller's perspective. If you're the buyer, read the table in reverse: the methods that protect you most are at the bottom.
Risk Spectrum at a Glance
The five methods sit on a continuous risk spectrum — the more a seller is protected, the less the buyer is, and vice versa:
| Cash in Advance | Letter of Credit | Documentary Collection | Open Account | Consignment |
|---|---|---|---|---|
| Max seller protection | Mutual protection | Moderate balance | Buyer-friendly | Max buyer protection |
| ←← Seller-protected | Buyer-protected →→ | ||||
How to Choose the Right Payment Method
Three questions determine the right method for any given transaction:
1️⃣ How well do you know this buyer or supplier?
No prior relationship: lean toward cash in advance or LC. After 2–3 successful transactions, documentary collection becomes workable. For an ongoing, verified relationship, open account is appropriate.
2️⃣ How large is the transaction?
For smaller values, the cost and paperwork of an LC may not be worth it — cash in advance is simpler. For larger values, the cost of an LC is a fraction of the risk you're absorbing if you ship on open account to someone you don't know.
3️⃣ Can you absorb the risk if something goes wrong?
If non-payment would materially damage your cash flow, do not use open account or consignment — regardless of how well you know the buyer. Size the protection to the consequence, not the relationship.
Use this as a starting framework:
| Buyer Relationship | Transaction Size | Suggested Method |
|---|---|---|
| New / first order | Small (under USD 10,000) | Cash in Advance |
| New / first order | Large (over USD 10,000) | Letter of Credit |
| Known, 2–5 prior orders | Any | Documentary Collection (D/P) |
| Established, creditworthy | Any | Open Account |
| Established distributor, proven track record | Ongoing | Consignment (with caution) |
💡 Example: A Hong Kong supplier shipping to a new US retailer on a USD 25,000 first order sits in the high-risk, low-trust quadrant. A letter of credit is the appropriate choice here, even if the buyer requests open account terms. After two or three successful transactions, documentary collection becomes workable.
The thresholds above are starting points, not rules. Your buyer’s market, the product type, and the currency corridor all affect the appropriate method. Adjust accordingly.
1
Cash in Advance
Cash in advance means the buyer pays before the goods are shipped. The seller receives funds, then fulfils the order.
The most common ways to structure a cash-in-advance transaction are as follows:
- Wire transfer (SWIFT): direct bank-to-bank transfer, typically used for larger amounts. Standard SWIFT transfers take 1–5 business days, depending on the corridor and intermediary banks involved.
- Credit card: widely accepted for smaller transactions. The buyer’s card issuer handles the transfer; the seller receives funds minus processing fees.
- Escrow services: a neutral third party holds the payment until the buyer confirms receipt of goods. A balanced option for first-time transactions where both sides want protection.
- Online payment platforms (PayPal, Stripe): convenient for digital services and small physical goods. Less common for high-value trade transactions.
Pros
- You're paid before you commit to production or shipping — no receivables, no chasing
- No credit checks needed — the buyer's financial history is irrelevant once the payment clears
- Works for any buyer in any country — no bank relationships or trade documentation required
Cons
- Buyers who have other options will push back. In competitive markets, demanding full prepayment can lose you the deal before it starts
- If the goods arrive damaged or don't match the order, the buyer has already paid — disputes hit harder when there's no leverage left on either side
- Doesn't scale well for repeat orders — asking for prepayment every time signals you don't trust the relationship, even when you do
📌 FX note: The seller typically receives payment in the agreed currency (often USD or EUR). With a multi-currency account, there’s no pressure to convert immediately — you can hold the funds in the original currency and convert when rates are favourable.
2
Letter of Credit
A letter of credit (LC), also called a documentary credit, is a written guarantee from the buyer’s bank to pay the seller a specified amount once the seller presents documents confirming shipment complied with the agreed conditions. It is governed by ICC UCP 600 (Uniform Customs and Practice for Documentary Credits), which has been the current governing standard since 2007.
The risk is transferred from the buyer to the issuing bank. That’s the practical advantage: the seller’s payment depends on the bank’s creditworthiness, not the buyer’s ability to pay on the day.
➡️ Here’s how an LC transaction works:
- Buyer and seller agree on transaction terms and specify that payment will be via LC.
- Buyer applies to their bank (the issuing bank) for an LC in favour of the seller.
- Issuing bank sends the LC to the seller's bank (the advising bank), which notifies the seller.
- Seller ships goods according to the LC conditions and gathers required documents: commercial invoice, bill of lading (the official shipping document proving goods were dispatched), packing list, certificate of origin, and any other specified documents.
- Seller presents documents to the advising bank within the LC's validity period.
- Advising bank checks compliance and forwards documents
- Issuing bank releases the payment (if documents comply) and forwards the documents to the buyer.
- Buyer uses the documents to collect the goods.
⚠️ Important: One discrepancy in your shipping documents — a misspelled address, a wrong date, a missing certificate — is enough to delay or block payment entirely. Check your document package against the LC conditions before you ship, not after.
Pros
- Payment is guaranteed by a bank, not the buyer — you're not relying on the buyer's willingness or ability to pay on the day
- The LC terms force both sides to document exactly what was agreed — less room for disputes over specs or delivery after the fact
Cons
- Setup takes 1–3 weeks and involves both banks — not practical for time-sensitive shipments or buyers who need to move quickly
- Issuing bank commission plus document handling fees add up — not worth it for small or repeat transactions.
📌 FX note: The LC specifies a currency for payment. If the payment currency differs from your operating currency, the rate difference between LC issuance (when you agreed terms) and actual payment (several weeks later) can produce a meaningful gain or loss. Forward contracts can lock in the rate at LC issuance.
3
Documentary Collection
Documentary collection sits between an LC and open account in terms of risk and formality. Banks act as intermediaries, handling the document exchange, but unlike an LC, no bank guarantees payment. If the buyer refuses to pay, the bank will not step in.
There are two variants:
➡️ Documents Against Payment (D/P)
The collecting bank releases shipping documents to the buyer only after full payment. The buyer cannot collect the goods without the documents. This gives the seller practical control over the goods until payment clears.
The risk: if the buyer refuses to pay, the seller has shipped goods to a foreign port and cannot easily reclaim them. Storage costs and repatriation expenses fall on the seller.
➡️ Documents Against Acceptance (D/A)
The collecting bank releases documents to the buyer once the buyer signs a time draft, which is a formal promise to pay by a specified future date, typically 30, 60, or 90 days. The seller hands over control of the goods in exchange for a payment promise, not payment itself.
D/A is materially riskier than D/P. The buyer has the goods; the seller has a promise. If the buyer defaults, the seller’s recourse is limited.
Pros
- Cheaper and faster than an LC — no bank payment guarantee, but also no LC fees or multi-week setup
- Under D/P, the buyer can't collect the goods without paying first — you keep physical control until the money moves
- Banks handle the document exchange, which adds process without adding the cost of full LC machinery
Cons
- If the buyer refuses to pay under D/P, your goods are sitting at a foreign port. Storage costs start immediately, and reclaiming them is slow and expensive
- D/A gives the buyer your goods in exchange for a signed promise to pay. If they default, you're in the same position as open account — but with extra steps
- Banks don't verify whether the buyer is creditworthy or likely to pay — that due diligence is entirely on you
4
Open Account
In an open account arrangement, the seller ships the goods and sends the invoice. The buyer pays within an agreed period, typically 30, 60, or 90 days after delivery or invoice date. The seller carries all payment risk for the entire period.
Open account is common in established international trade relationships. It is one of the most advantageous options for the buyer in terms of cash flow — and that advantage comes entirely at the seller's cost.
💡 Tip: Before agreeing to open account terms, run a credit check on the buyer or ask for trade references from their existing suppliers. For larger amounts, trade credit insurance can cover non-payment risk without changing the payment terms the buyer sees.
Pros
- Large buyers — retailers, distributors, corporates — often won't trade on any other terms. Refusing open account in established corridors can end the conversation
- No per-transaction bank fees or instrument setup — lower overhead on both sides once the relationship is running
Cons
- You carry the full payment risk from the day goods ship until the day payment clears — 30, 60, or 90 days with no instrument protecting you
- There's no early warning if a buyer is planning to delay — a payment that's coming looks identical to one that isn't, until the due date passes.
- Cross-border debt recovery is rarely economical — legal costs in a foreign jurisdiction often exceed what you'd collect.
📌 FX note: Open account has the longest FX exposure window of the five methods. If you invoice in USD and your costs are in HKD or EUR, a 90-day payment window leaves you fully exposed to rate movements across that period. FX forward contracts — where you lock in the exchange rate at the time of invoicing — are the standard tool for managing this.
5
Consignment
Consignment is the riskiest method for sellers. You ship goods to a foreign distributor, retain legal ownership until the goods are sold to end customers, and receive payment only after the sale occurs.
The commercial logic: it lowers barriers to entry for distributors in new markets, as they don't commit capital upfront. It's common in industries where the distributor needs to hold inventory to serve their customers, such as retail, fashion, and some industrial sectors.
The legal exposure: customs, storage liability, and recourse in the event of goods being damaged, lost, or unsold, all need to be addressed in the consignment agreement before shipping.
⚠️ Consignment is suitable only for established foreign distributors with a proven track record. If you're considering it for the first time, get specific legal advice on the agreement structure for the relevant jurisdiction before committing.
Pros
- Removes the distributor's upfront capital commitment — which can open markets that wouldn't take you on any other terms
- The distributor is directly motivated to sell — they don't earn until the goods move
Cons
- You have no guaranteed payment date and no guaranteed payment at all. Cash flow planning is guesswork until the distributor reports a sale
- You can't independently verify sell-through. You see only what the distributor chooses to report, which creates room for disputes over volumes and timing
- If the distributor runs into financial trouble, your goods can get caught in their insolvency. Recovering them across a border is a legal process, not a phone call
- No defined payment date means your FX exposure has no end point. The rate when payment eventually arrives can look very different from the rate when goods shipped
📌 FX note: Consignment has the highest FX exposure of all five methods. There is no defined payment date, so the rate at the time of eventual payment can differ materially from the rate when goods were shipped. A multi-currency account and FX hedging strategy are essential for any volume consignment programme.
Bottom Line
Choosing the right payment method solves the risk question. The account you use to execute it determines whether you lose money on the FX side.
Every method in this article involves a currency handoff at some point — and most SMEs are running those handoffs through a single-currency account that converts automatically at whatever rate is live. That cost is quiet, but it compounds across every transaction.
A multi-currency account changes the equation. You hold each currency until the rate is right, and forward contracts let you lock in rates on future payment obligations before the invoice is even sent.
Statrys business accounts are built for cross-border trading companies paying suppliers and collecting from buyers across multiple currencies. You get 11 currencies under a single account number, convert at FX rates starting from 0.1% on real-time mid-market pricing, and use forward contracts to lock in rates before the invoice is sent.
FAQs
What is the safest payment method for international trade?
Letters of credit are the safest formal instrument for both sides of the transaction. A bank guarantees payment once the exporter presents compliant shipping documents, removing dependence on the buyer's creditworthiness entirely. For sellers willing to absorb all risk themselves, cash in advance offers maximum protection. For buyers, open account terms provide the most security. The safest method depends on which side of the transaction you're on and how much of the risk you can absorb if something goes wrong.
