Bank payment obligation (BPO)
A bank payment obligation, or BPO, is the buyer's bank's promise to pay the seller's bank once the order, transport and invoice data match. Banks deal only with data, and both banks must use the same matching system.
Bill of exchange and promissory note
A bill of exchange is a seller's signed order for the buyer to pay a fixed sum; a promissory note is the buyer's signed promise to pay. Both can fall due on a set date and can be passed on or sold for cash before then.
Documentary collection, documents against acceptance (D/A)
Under documents against acceptance (D/A), the importer gets the shipping documents by signing a draft that promises payment on a set later date. The exporter gives time to pay and holds a signed promise, while the banks move the papers and take no risk on the buyer.
Documentary collection, documents against payment (D/P)
In a D/P documentary collection, the banks hold the shipping documents until the importer pays at sight. The exporter keeps control of the goods by sea, but no bank promises to pay.
Standby letter of credit
A standby letter of credit is a bank's backup promise to pay if one side fails to pay or perform. The exporter can sell on open account with a bank to fall back on, and the importer repays the bank for any payout.
Revolving letter of credit
A revolving letter of credit is an LC whose amount is restored after use, by time or by value, so one LC can pay for a series of repeat shipments. Learn the cumulative and non-cumulative types and what each side gains and must watch.
Back-to-back letter of credit
A back-to-back letter of credit uses two separate LCs: a master LC from the buyer's bank to a middleman, and a second LC from the middleman's bank to the supplier. The middleman's bank looks to the master LC for repayment.
Transferable letter of credit
A transferable letter of credit lets a trader in the middle pass the buyer's LC, fully or partly, to its supplier. The supplier is paid on matching documents, and the trader swaps in its own invoice to collect the difference.
Confirmed letter of credit
A confirmed letter of credit adds a second bank's promise to pay the exporter, on top of the buyer's bank. It covers the risk of the buyer's bank and country, while the documents must still match the LC.
Letter of credit (usance, acceptance, deferred payment)
A usance letter of credit is a bank's promise to pay the exporter on a set later date, once documents that match the LC are presented. The importer gets the goods before paying, and the exporter holds a bank's promise.
Letter of credit (sight)
A sight letter of credit is a bank's promise to pay the exporter once documents that match the LC are presented. The exporter relies on the buyer's bank, and the importer pays only after seeing proof the goods shipped.
Open account
In an open account sale, the exporter ships first and the importer pays later, typically in 30, 60 or 90 days. The importer gains time to pay. The exporter carries the risk of not being paid and the cost of waiting.
Cash in advance
With cash in advance, the buyer pays before the goods are shipped. The seller avoids the risk of not being paid, and the buyer carries the risk until the goods arrive. See who does what, the steps, and when it fits.
A bill of exchange turns a trade debt into a signed, transferable claim, which courts treat as close to cash
A bill of exchange is an unconditional written order to pay, and a promissory note is an unconditional written promise to pay. Both can change hands and be discounted, and the English High Court has said bills are generally treated as cash.
Standby letters of credit and demand guarantees do the same job, differing mainly in rules and vocabulary
A standby letter of credit and a demand guarantee both pay the beneficiary on a complying demand after a default. Standbys usually follow ISP98 and demand guarantees URDG 758; the main differences are terminology and practice.
A documentary collection lets banks hold the documents until the buyer pays or accepts, with no bank promising to pay
In a documentary collection the seller's bank sends documents to the buyer's bank, which releases them against payment (D/P) or acceptance of a draft (D/A). No bank promises to pay.
Open account ships the goods before the invoice is due, so the seller finances the buyer for 30 to 90 days
In an open account sale the goods ship before payment is due, typically in 30, 60 or 90 days. The seller carries the buyer's payment risk and can manage it with export credit insurance, a standby letter of credit or receivables finance.
A letter of credit puts a bank's promise behind the buyer's, and the bank pays only against complying documents
A letter of credit is a bank's commitment, on behalf of the importer, to pay the exporter if the credit's terms are met. The bank pays only when the exporter's documents comply.
