Four payment terms decide who waits for cash, and each step toward open account moves the risk to the seller
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Ossiano Guides · Payment methods
Cash in advance, letters of credit, documentary collections and open account differ in who carries the risk, when the seller is paid, which documents move through banks and which rules apply.
Terms like this have a quick explainer. Tap or hover on them.
01 · The spectrum
Payment terms run from buyer-funded to seller-funded, with two bank-handled methods in between
Every export sale needs agreed . These terms say how and when the buyer pays the seller. They also decide who waits for cash, and who carries the risk while they wait.
The US International Trade Administration (ITA) sets out four main terms in its Trade Finance Guide, published in July 2022. It orders them by risk. At one end is : the buyer pays first, so the importer carries almost all the risk. At the other end is : the seller ships first and is paid later, so the exporter carries substantial risk.
Two methods sit in between. In both, banks handle the shipping documents. Under a (LC), a bank promises to pay. Under a , banks pass the documents on but make no promise to pay. The ITA's Methods of Payment page calls open account one of the most advantageous options for the importer and one of the highest risk options for the exporter.
Much trade never goes through a bank at all. The firms simply give each other credit. The BIS Committee on the Global Financial System (CGFS) says this firm-to-firm covers both open account and cash in advance deals.
Figure 1 · Interactive
Four payment terms, four answers to the same questions
Tap a payment term to see who carries the risk, when the seller is paid, which documents move and which rules apply.
02 · Cash in advance
Cash in advance pays the seller before the goods leave
Under cash in advance, the buyer pays in full, or pays a large part, before the goods ship. Payment is usually by credit card or , a direct bank-to-bank payment, the ITA guide says. International wire transfers are common and almost immediate.
The seller is paid before the goods change hands. So the exporter can avoid credit risk, the risk that the buyer never pays, as the ITA notes. The buyer carries the opposite worry: that the goods may never be sent.
The ITA recommends cash in advance for high-risk trade relationships or export markets. It also suits small export sales, the guide adds. Our cash in advance card sets out each step.
03 · Letters of credit
A letter of credit puts a bank's promise in place of the buyer's, as long as the documents are right
With an LC, the seller relies on a bank, not on the buyer. The ITA defines an LC as a commitment by a bank, made for the buyer, to pay the seller if the terms of the LC are met. The bank that makes this promise is the . Its duty to pay depends only on the seller's documents matching the LC terms.
When the seller hands in documents that match, this is a . The bank then pays in one of three ways, the ICC Academy explains. It pays at sight, which means straight away. Or it gives a , a promise to pay on a later date. Or it accepts a , a written order to pay, and pays it when due. The time until that later date is the .
Both sides gain and give something up. A , a mismatch in the documents, may stop the seller being paid, the ITA warns. The buyer, in turn, gets documents that show the goods were shipped as agreed. The ITA also lists the LC as labor intensive and relatively expensive in transaction costs.
Most LCs follow one rulebook, , from the International Chamber of Commerce (ICC). The ICC brought it into use on July 1, 2007. Our guide to letters of credit walks through each step, and the sight LC card gives the short version.
04 · Documentary collections
A documentary collection uses banks to carry the documents, but no bank promises to pay
In a collection, banks act as trusted couriers for the shipping documents. The seller's bank, the , sends the documents to the buyer's bank, the or . It sends them with instructions for payment and release, the ITA guide explains.
There are two kinds. Under (D/P), the buyer pays the draft at sight to get the documents. Under (D/A), the buyer signs a promise to pay the draft on a set future date. The ICC's rules apply when the collection instruction says the collection is subject to them.
The banks control the flow of documents. But they neither check the documents nor take risks, the ITA notes. That makes collections less complicated and less expensive than LCs. The documents control who gets the goods only for ocean shipments. With air and overland shipments, the buyer can take the goods without paying.
The bank's instructions matter. In ICC DOCDEX Decision No. 370, all three collections told the bank to release documents only against payment. The collecting and presenting bank released them before payment. The ICC experts found it had gone beyond the remitting bank's instructions, in breach of URC 522 article 18.
"The Respondent breached the specific instructions of the remitting bank."
International Chamber of Commerce, DOCDEX Decision No. 370, conclusion
Our guide to documentary collections goes further. The D/P card and D/A card show each step.
05 · Open account
Open account ships first and collects later, the term buyers like most
Under open account, the goods ship before payment is due. Payment typically falls due in 30, 60 or 90 days, the ITA guide says. The ITA recommends open account for low-risk trading relationships or markets, and in competitive markets to win customers.
Sellers can protect themselves. lets exporters offer competitive open account terms while minimizing the risk of non-payment, the ITA adds. See our guides to open account trade and trade credit insurance, and the open account card.
Each term also decides who pays to wait. Waiting costs money, because the cash is tied up. The calculator below shows how many days each side funds the trade, and what that costs at an illustrative rate.
Figure 2 · Try it
Who funds the gap between shipment and payment
Pick a payment term and a credit term. The result shows how many days each side funds the trade and what that costs at the rate chosen.
Payment term
Credit term, days from shipment (D/A and open account)
Annual cost of funds, what each side pays for money (illustrative)
Transit days, shipment to arrival
Document days, shipment to paid documents (LC and D/P)
Seller waits for cash after shipment
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Buyer pays before the goods arrive
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Funding cost, seller / buyer
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How the timing works: under cash in advance the buyer pays 15 days before shipment. Under a letter of credit and D/P the seller is paid when the documents are paid. Under D/A and open account the seller is paid at the end of the credit term, counted from shipment. The 30, 60 and 90 day terms follow the ITA's typical open account terms.
Our Research Desk used simple interest: invoice x annual rate x days / 360, the US money market . Bank fees are excluded. The rates shown are for illustration and are not Ossiano pricing.
This calculator explains the concept only. Actual timing and cost vary with the route, the documents, the banks involved and each party's cost of funds.
06 · Scale
Banks support about one-third of global trade, and letters of credit about one-sixth
Only part of world trade runs through banks. The BIS CGFS estimates that bank-provided directly supports about one-third of global trade. It finds that letters of credit cover about one-sixth of total trade. It puts the 2011 flow of bank trade finance at US$6.5 to 8 trillion, of which around US$2.8 trillion was LCs. These estimates were published in January 2014 and use 2011 data.
Other published figures measure different things. IMF and BAFT-IFSA bank surveys from 2009 to 2011, as reported by the CGFS, put bank trade finance at about 40% of global trade. The rest ran on open account or cash in advance. The World Trade Organization says some 80 to 90 percent of world trade relies on trade finance. That is a wider measure: it counts trade credit, insurance or guarantees, mostly short-term. Each figure has its own definition, so read them as separate measures.
Trade itself keeps growing. Global trade reached a record US$35 trillion in 2025, according to the ICC Trade Finance Pulse Check of September 2026. In the same survey, around 40% of banks report declining LC margins. The latest standalone ICC Global Survey is the 2020 edition.
Figure 3
How much trade runs through banks
Each card is a published estimate on its own basis, so read them side by side as separate measures.
Source: Bank for International Settlements, CGFS Papers No 50, Trade finance: developments and issues, January 2014, pages 1, 8 and 9. The 40% figure is from IMF and BAFT-IFSA bank surveys, 2009 to 2011, as reported by the CGFS.
07 · Ossiano view
The payment term is the first financing decision in every trade
OBSERVATION 01
Every term gives the funding gap an owner
Cash in advance lets the exporter avoid credit risk. Open account is among the most advantageous options for the importer. The term chosen sets whose balance sheet carries the days between shipment and cash.
OBSERVATION 02
Banks play two different roles in the middle of the spectrum
Under a letter of credit, a bank commits to pay. Under a collection, banks control the flow of documents without taking risk. Both give the parties a bank-handled document exchange, with different levels of assurance.
OBSERVATION 03
Most trade settles between the firms themselves
Bank trade finance supports about one-third of global trade. The rest is credit between firms, on open account or cash in advance. That is the space the GSCFF's techniques were defined to serve.
Summary
The payment term decides who funds the trade
Under cash in advance, the buyer pays before shipment, so the seller avoids credit risk. Under a letter of credit, a bank commits to pay the seller when the stated terms are met. Under a documentary collection, banks release documents against payment or acceptance but take no risk. Under open account, the seller ships first and is paid, typically, in 30, 60 or 90 days.
Each step from cash in advance toward open account moves more of the waiting, and more of the risk, to the seller. On the BIS CGFS estimate, bank trade finance supports about one-third of global trade.
Related guides: Letters of credit; Open account trade; Documentary collections; Standby letters of credit vs bank guarantees; Incoterms; How trade finance is priced; The cash conversion cycle; Trade credit insurance.
Instrument cards: Cash in advance; Letter of credit (sight); Letter of credit (usance, acceptance, deferred payment); Confirmed letter of credit; Documentary collection, D/P; Documentary collection, D/A; Open account; Bank payment obligation (BPO).
Every term in this guide is defined in our Trade Finance Glossary.
For questions on how payment terms affect existing or planned trade flows, contact the Ossiano Research Desk.
Sources
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), July 2022. Supports: the risk order of the four payment terms; definitions, risks and ITA recommendations for cash in advance, letters of credit, documentary collections (page 12) and open account (Chapters 3 to 6); the illustrated LC steps; the 30, 60 or 90 day open account terms; publication date.
- US International Trade Administration, Methods of Payment, undated. Supports: cash in advance lets the exporter avoid credit risk; open account as one of the most advantageous options to the importer and one of the highest risk options for an exporter.
- US International Trade Administration, Export Credit Insurance, undated. Supports: export credit insurance and open account terms.
- Bank for International Settlements, Committee on the Global Financial System, CGFS Papers No 50, Trade finance: developments and issues, January 2014. Supports: about one-third of global trade supported by bank-intermediated trade finance; LCs cover about one-sixth of total trade; 2011 flow of US$6.5 to 8 trillion, around US$2.8 trillion LCs (page 8); inter-firm trade credit covers open account and cash in advance (page 4); IMF and BAFT-IFSA survey estimate of about 40% (page 9).
- International Chamber of Commerce, ICC's new rules on documentary credits now available, December 4, 2006. Supports: UCP 600 implementation date, July 1, 2007.
- International Chamber of Commerce, International Standard Banking Practice (ISBP), ICC Knowledge 2 Go, 2023. Supports: ISBP edition and year.
- International Chamber of Commerce, eUCP, ICC Publication No. 823E, rules PDF, 2023. Supports: eUCP Version 2.1.
- ICC Digital Library, URC 522 rules text, 1995. Supports: URC 522, 1995 Revision; financial and commercial documents (Article 2(b)); the collection instruction (Article 4(a)); release against acceptance or payment (Article 7(b)).
- ICC Digital Library, eURC Version 1.1 rules text, undated. Supports: eURC Version 1.1.
- International Chamber of Commerce, ICC launches first-ever rules for open account trade, April 17, 2013. Supports: URBPO adoption and effective date, July 1, 2013.
- International Chamber of Commerce, Incoterms rules, undated. Supports: Incoterms 2020 in force since January 1, 2020, the current edition.
- Global Supply Chain Finance Forum, Standard Definitions for Techniques of Supply Chain Finance, 2016. Supports: GSCFF Standard Definitions, publisher and year.
- ICC Academy (David Meynell, ICC Banking Commission), Introduction and Types of Documentary Credit, undated. Supports: the three ways a bank honors a credit.
- International Chamber of Commerce (ICC Digital Library), DOCDEX Decision No. 370 (URC 522), undated. Supports: the D/P instructions, release before payment, and the conclusion quoted in section 04.
- International Chamber of Commerce, ICC Trade Finance Pulse Check, September 2026, September 2026. Supports: global trade of US$35 trillion in 2025; around 40% of surveyed banks reporting declining LC margins.
- International Chamber of Commerce, ICC Global Survey, July 21, 2020. Supports: the 2020 edition as the latest standalone ICC Global Survey.
- World Trade Organization, Trade finance, undated. Supports: some 80 to 90 percent of world trade relies on trade finance.
- Alternative Reference Rates Committee, SOFR "In Arrears" Conventions for Syndicated Business Loans, July 22, 2020. Supports: Actual/360 as the standard US money market day count, used in Figure 2.
- Board of Governors of the Federal Reserve System, Selected Interest Rates (Daily), H.15, September 29, 2026. Supports: money market rates annualized on a 360-day year, used in Figure 2.
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