Payment Terms in Export: Advance, LC, TT and Balance Payment

Payment terms are one of the most negotiated parts of any export order. They are also where the buyer's and seller's risk interests most directly conflict. This article explains the most common payment terms used in Indian exports and how to structure them sensibly.

The fundamental tension

The seller wants payment certainty as early as possible — ideally 100% advance — because they need to fund raw material and production. The buyer wants to delay payment as long as possible — ideally 100% on safe arrival — because they want to confirm the goods meet spec before paying.

Realistic payment terms sit somewhere between these two positions. The most common structure in Indian exports is "advance + balance", often paired with a Letter of Credit for larger orders.

Telegraphic Transfer (TT) / Wire Transfer

TT (also called T/T, wire transfer or SWIFT transfer) is a direct bank-to-bank transfer. It is the most common payment method for Indian exports. TT is fast, simple and inexpensive. However, once funds are sent, they cannot be reversed. TT is best used in combination with other safeguards (PI, sample approval, PSI, milestone payments).

Advance payment

An advance payment is a TT sent before production starts. Advance is typically 20–50% of the order value, with 30% being common. Advance serves several purposes:

• Confirms the buyer's commitment.
• Allows the supplier to source raw material.
• Funds the initial production setup.
• Allows the supplier to allocate capacity.

From the buyer's perspective, advance is a risk — the supplier could fail to deliver. To manage this risk:

• Verify the supplier before paying any advance.
• Have a signed PI on record before paying advance.
• Pay advance only to the supplier's registered bank account.
• For larger orders, consider an LC instead of large advance.

Balance payment

The balance is paid at a defined trigger. Common triggers include:

• "Against shipping documents" — balance paid when shipping documents (B/L copy, invoice, packing list) are received.
• "Before shipment" — balance paid before the goods leave the supplier's premises, often after a satisfactory PSI report.
• "Against B/L copy" — balance paid when the B/L copy is sent.

The "before shipment, after satisfactory PSI" structure is one of the most buyer-protective structures. It allows the buyer to confirm quality before the balance is released, while still giving the supplier payment certainty before the goods leave the warehouse.

Letter of Credit (LC)

A Letter of Credit is a written undertaking by the buyer's bank to pay the seller on presentation of compliant documents. An LC substitutes the issuing bank's credit for the buyer's, which protects the seller. At the same time, the LC protects the buyer because payment is made only when the seller presents documents that strictly comply with the LC terms.

LCs are commonly used for:

• Larger orders.
• First-time supplier relationships.
• Buyers and sellers in different regulatory environments.
• Transactions where both parties want bank-level security.

### Types of LC

• **Sight LC** — payment on presentation of compliant documents.
• **Usance / Deferred LC** — payment at a fixed period after presentation (e.g., 60 days sight).
• **Confirmed LC** — a second bank adds its confirmation, useful when the issuing bank's country risk is a concern.
• **Revocable vs irrevocable** — irrevocable LCs are standard; revocable LCs are rarely used.
• **Transferable LC** — allows the supplier to transfer part of the LC to their own upstream supplier.

### How an LC works in practice

1. 1Buyer and seller agree on terms in the PI.
2. 2Buyer applies to their bank to issue an LC in favour of the seller.
3. 3Issuing bank sends the LC to the seller's bank (advising bank).
4. 4Seller ships and presents documents to their bank.
5. 5Documents are checked against the LC terms.
6. 6If documents comply, payment is released to the seller.

### LC pitfalls

• **Strict document compliance** — banks operate on documents, not goods. Even minor discrepancies (a typo, a missing signature, a wrong date) can cause refusal.
• **Slow process** — LC issuance, presentation and examination take time. Plan for it.
• **Bank fees** — LCs carry issuance fees, advising fees, negotiation fees and discrepancy fees.
• **LC terms must mirror the PI** — if the LC terms differ from what was agreed in the PI, disputes follow.

Always have an LC draft reviewed by an experienced trade finance professional before it is issued.

Documents against Payment (D/P) and Documents against Acceptance (D/A)

D/P and D/A are documentary collection methods:

• **D/P** — the buyer receives shipping documents only after paying the seller's bank. Less secure than an LC, but cheaper.
• **D/A** — the buyer accepts a draft (a written promise to pay at a future date) and receives documents, paying later. Riskier for the seller.

D/P and D/A are less common in modern Indian exports because TT and LC dominate, but they are still used in some trade relationships.

Open account

Under open account, the seller ships and the buyer pays later (e.g., 30 days after B/L date). This is the most buyer-favourable structure and the most seller-risky. Open account is typically used only between established parties with a long track record, often backed by trade credit insurance.

Escrow

Escrow services hold buyer funds until agreed conditions are met, then release to the seller. Availability and reliability of escrow services varies significantly by country and provider. Some buyers use third-party escrow platforms for first orders, but it is less common in mainstream Indian export trade.

Recommended structures by scenario

• **First order with a new supplier** — 30% advance, 70% balance against satisfactory PSI report and shipping documents.
• **Established supplier, repeat order** — 30% advance, 70% balance against B/L copy.
• **Large order, new supplier** — Irrevocable Sight LC.
• **Very large order** — Confirmed Irrevocable Sight LC.
• **Small first order** — 50% advance, 50% balance before shipment, after PSI.

Common mistakes

• Paying 100% advance to an unverified supplier.
• Sending funds to a personal or third-party account.
• Not tying balance payment to PSI.
• Issuing an LC without professional review of the draft.
• Not reading the PI's payment terms before paying.
• Mixing currencies or payment references.

Disclaimer

Final payment terms are always subject to the Proforma Invoice and to mutual agreement. This article is general guidance, not legal or trade finance advice. For specific transactions, consult your bank and a qualified trade finance professional.

How Blueroute Exim helps

Blueroute Exim's preferred payment structure is "50% advance and 50% before shipment, after satisfactory inspection" — with the note that final terms depend on buyer profile, supplier terms, order size, inspection requirements and product category. We help buyers structure payment terms that protect both sides. References are available on request.