Payment terms are negotiated on every order, and the negotiation is really about one question: who carries the risk of the other party not performing? The seller worries about shipping goods and not being paid. The buyer worries about paying and not receiving goods, or receiving the wrong ones.
Telegraphic transfer
A TT is a bank wire. It is cheap — typically a modest flat fee — and it settles in a day or two. There is no bank checking documents, which means no bank protecting either party.
In practice it is structured as a split:
- 30% advance, 70% against scanned bill of lading. The most common arrangement for established relationships. The seller has enough deposit to cover procurement, the buyer releases the balance once proof of shipment exists.
- 50/50 for a first order with an unknown counterparty.
- 100% advance for small trial orders and sample shipments, where the LC cost would exceed the order value.
Letter of credit
An LC — properly a documentary credit — is an undertaking by the buyer's bank to pay the seller, provided the seller presents documents that comply exactly with the credit's terms. Most are issued subject to UCP 600, the ICC rules that govern how banks handle them.
The important thing to understand is that banks deal in documents, not goods. The bank never inspects the cargo. It checks whether your paperwork matches what the credit demanded. If the credit says "Basmati Rice 1121 Sella" and your invoice says "Basmati Rice 1121 Steam", that is a discrepancy, and the bank can refuse to pay even though the goods are perfectly good.
What it costs
The buyer pays issuance and amendment fees to their bank. The seller pays advising, negotiation and often confirmation fees. Between them it commonly runs to a meaningful percentage of the order value, and the buyer's credit line is tied up for the duration. On a 20-foot container of pulses, the fees can eat a visible share of the margin. On a 200-tonne order, they are noise.
Where LCs go wrong
- Discrepancies. A large share of first presentations are rejected on first pass. Almost always trivial — a spelling difference, a missing certificate, a late shipment date.
- Impossible conditions. Credits sometimes require documents the seller cannot obtain, such as an inspection certificate signed by the buyer, which hands the buyer a veto over payment.
- Tight windows. If the credit allows 21 days for presentation and your phytosanitary certificate takes 10, you have less room than you think.
Ask for a draft of the credit before it is issued. Read it against what you can actually produce. Amendments after issuance cost money and delay shipment.
A rough guide
| Situation | Sensible terms |
|---|---|
| Sample or trial order | 100% advance TT |
| First container, new buyer | 50% advance, 50% against BL copy |
| Repeat buyer, moderate value | 30/70 TT |
| Large order, new buyer | Irrevocable LC at sight |
| Buyer in a country with transfer restrictions | Confirmed LC |
A confirmed LC adds a second bank, usually in the seller's country, guaranteeing payment independently of the issuing bank. It costs more and is worth it when the issuing bank is small, unfamiliar, or sits in a jurisdiction with currency controls.
What we do
ZS works on advance TT and LC at sight. We will quote either. For a first order we usually suggest a split TT on a single container — it keeps the cost of finding out whether we are a good fit as low as possible for both sides.