After you have determined the goods, the supplier and the delivery conditions, the turn reaches the most important financial question: how do I pay? The choice of the payment method in international trade strikes the balance between the security of the seller and the confidence of the buyer. Each method has a different risk, cost and time, and the right choice protects your contract from the costly disputes.
The main payment methods
1. Bank transfer (T/T - Telegraphic Transfer)
Higher risk for the buyer, the simplest and the most common method:
- The buyer transfers the amount directly to the seller’s account
- In two forms: full payment before the shipment, or a partial prepayment + the rest after the receipt of the shipping documents
- Suitable: experienced buyers and trusted suppliers
2. Letter of Credit (L/C)
Balanced risk; the safest method for both parties:
- The buyer’s bank undertakes to pay after the conforming documents are presented
- The seller receives the payment by presenting the shipping documents
- Suitable: large transactions and parties that are new to each other
- It has more cost and time (bank fees and the examination of the documents)
3. Documentary collection (D/P and D/A)
The intermediate method:
- The shipping documents are sent through the seller’s bank to the buyer’s bank
- In D/P the payment is made against the documents
- In D/A the documents are delivered against the issue of a draft with a maturity date
Comparison of the payment methods
| Method | Risk for the buyer | Risk for the seller | Cost | Speed |
|---|---|---|---|---|
| Remittance (T/T) | high | low | low | high |
| Letter of Credit (L/C) | low | low | high | medium |
| Documentary collection (D/P) | medium | medium | medium | medium |
| Documentary collection (D/A) | medium | higher | medium | medium |
Important note: the choice of the payment method must be coordinated with the delivery condition (Incoterms). For example in a letter of credit, the shipping documents must conform to the delivery condition; see the complete guide in the 2020 Incoterms rules.
Key points of the Letter of Credit (L/C)
- Conformity of the documents: the smallest discrepancy between the documents and the terms of the credit delays the payment
- Types of L/C: transferable, irrevocable and at sight are the common types
- Timing of the credit: determine the expiry date and the latest shipment date accurately
Note: if the goods documents (invoice, waybill, certificate of origin) do not conform, the bank may refuse the payment. This is where the complete export documents gain a double importance.
Which method is better for you?
- A new or unreliable supplier: letter of credit (L/C) is the safest option
- An experienced and trusted supplier: bank transfer (T/T) is simpler and cheaper
- A small consignment and samples: remittance and sometimes the payment through commercial cards
- A large transaction with a high risk: a combination of a partial prepayment + a letter of credit
FAQ
Which is the riskiest payment method?
A full remittance before the shipment is risky for the buyer; unless you have full trust in the supplier.
Does the payment method affect the customs duties?
Not directly, but the paid amount and the declared value must be coordinated; the duties are calculated on the basis of the CIF customs value.
How long does a letter of credit take?
Opening the credit and examining the documents take from a few days to a few weeks and must be included in the shipment plan.
Which method is recommended to start trade with Turkey?
For the first transactions, a letter of credit or a partial prepayment by transfer is safer; as the trust is formed, they move to the full transfer. See these points in more detail in choosing a reliable Turkey supplier.
Summary
The payment method is the backbone of a secure trade contract. By knowing the transfer, the letter of credit and the documentary collection and coordinating it with the delivery condition and the value of the goods, you can control the financial risk of the transaction. The Vira Farabar Logistics team accompanies you in choosing the secure payment method and completing the bank-conforming documents.
