Advance, LC, DP, DA and open account: what each payment term costs you

A buyer asks for 60 days. Your competitor has offered 90. Somebody in the room says insist on a letter of credit, somebody else says that loses the order, and the discussion turns into an argument about how far the buyer can be trusted. The question underneath it is narrower than that: at the moment you no longer control the goods, what do you hold instead?

The terms, from safest to riskiest for you#

Advance payment. The buyer pays before you ship. You carry no payment risk. Few buyers agree beyond a first small order or a custom-made item, because it puts all the risk on them. A partial advance, a deposit against production with the balance against shipment, is far more commonly accepted and is worth asking for. The obligation runs the other way too: RBI rules require you to ship against an advance within a set window, three years from the date you received it, provided the advance is declared as such in your export documentation. Money you have banked but not shipped against inside that window is a compliance problem you create for yourself, separate from anything the buyer does.

Letter of credit. The buyer's bank undertakes to pay you against documents that comply with the credit. You are relying on a bank's undertaking rather than on the buyer's willingness, and on your own paperwork being right. That second condition is the part exporters underestimate. A discrepancy in your documents suspends the bank's obligation and hands the decision back to the buyer, which is why credits fail as often through paperwork as through bad faith.

Documents against payment (DP). You ship, then send the documents through your bank to the buyer's bank with instructions to release them only against payment. No bank has promised you anything here; the bank is following instructions.

The security depends entirely on the transport document, and this is where the term is misunderstood. It works when the goods can only be collected by whoever holds the paper, which means a negotiable bill of lading made out to order, where the carrier releases the cargo against a surrendered original. It does not work on an air waybill, a straight bill of lading consigned to the named buyer, a sea waybill or a road consignment note. On those the carrier releases the goods to the named consignee against proof of identity, paid or not. An exporter who ships by air on DP terms can lose the goods and the money on the same consignment.

Documents against acceptance (DA). The same mechanism, except the documents are released when the buyer accepts a bill of exchange promising to pay on a future date. The buyer takes the goods now and pays later. From the moment of acceptance you have no goods and no money, only a promise. DA and DP are spoken about as variations of one thing and carry materially different risk.

Open account. You ship, you invoice, and the buyer pays on the agreed date. Nothing protects you except the relationship and whatever recourse you have if they do not pay. It is also what most established buyers in developed markets expect, which is why it is common despite being the riskiest.

The costs that do not appear in the negotiation#

Cash locked up. A 90-day open account is you financing your buyer for three months. That money has a cost, whether you borrow it or do without it. It belongs in your price, and it usually is not there.

Bank charges. Credits and collections both carry them, and under a credit there may be advising, confirmation and amendment fees. Who pays which is negotiable, so agree it rather than assume it.

The order you did not win. The most expensive term is sometimes the safe one that lost you a buyer who would have paid perfectly well for the next ten years.

Choosing#

Match the term to the buyer's record, and move down the list as trust is earned. A first order from someone met at a trade fair is a different proposition from the tenth from someone who has paid on time for three years. Starting at advance or letter of credit and offering open account after a few clean cycles gives the buyer something to work towards rather than a flat refusal.

Price the term. If you agree 90 days, the cost of those 90 days is yours to carry and should be in the number. Exporters routinely concede payment terms in a negotiation about price without repricing, which is a discount that nobody named.

Consider credit cover for the risk you cannot avoid, and get a buyer-specific limit approved before you ship. ECGC, a government-owned insurer under the Ministry of Commerce and Industry, covers commercial risks — the buyer's insolvency, failure to pay within four months of the due date, and wrongful refusal to accept goods already exported — as well as political risks in the destination country. Two things about how the cover actually works are worth knowing before you rely on it.

It pays a percentage of the loss, not the loss. The policy insures you "against a percentage of the Amount of Loss", and requires you to "retain so much of the amount of loss as is in excess of the percentage of loss payable by ECGC under this policy to his own account and uninsured". Whatever the shortfall, part of it stays yours.

And ECGC's liability for commercial risks on any one buyer is capped at that buyer's credit limit. If you have applied and ECGC has approved a limit in writing, that approved figure is the cap. If you have not applied, or ECGC has not yet decided, you are not uncovered — the policy sets a default limit instead: ₹40 lakh on documents-against-payment or cash-against-documents terms, ₹20 lakh on documents-against-acceptance or open delivery (and only if you completed the previous policy period and paid at least ₹5 lakh in premium on it), with no more than two claims payable on limits availed this way. Where you have shipped to that buyer before on identical terms within the past two years and were paid on time every time, the default is the highest amount that was outstanding on those shipments, capped at ₹80 lakh per buyer and ₹30 lakh for open account or DA terms. All of it depends on the buyer not appearing on ECGC's adverse-notice list.

So the risk of shipping first and applying later is not that you have nothing. It is that you have a low, conditional, two-claim cap that bears no relation to the size of the order in front of you. Get the buyer-specific limit in place, and raised if the order grows, before you ship rather than after.

Cover also pays a percentage of the loss, not the loss itself. The standard policy wording is explicit that what ECGC pays is "a percentage, as specified in Schedule I, of the amount of loss" — so the figure is set in your own policy schedule, not fixed across all exporters, and the balance stays uninsured. Read Schedule I of the policy you are actually offered before you treat the cover as the size of the order. It does not make a bad buyer good and it does not pay instantly, but within its limit and its percentage it converts an open-ended exposure into a defined one. Terms, exclusions and waiting periods vary by policy.

Watch the concentration. One buyer at 60 days is a payment term. One buyer at 60 days taking 70 per cent of your production is the actual risk, and no payment term fixes that.

The realisation clock runs regardless#

Whichever term you agree, the proceeds still have to be realised and repatriated within the period set out in the RBI's Master Direction on Export of Goods and Services. Your arrangement with the buyer does not change that, and until your bank matches the money to the shipment, the shipping bill stays open in the RBI's records.

That period has moved twice in the past year and moves again shortly: 9 months was extended to 15 months by a notification dated 13 November 2025, then reverted to 9 months by one dated 5 June 2026, and a new framework takes over on 1 October 2026 setting it at 15 months generally (18 months where the export is invoiced or settled in rupees). Before agreeing an unusually long credit period, confirm the period that will actually apply to that shipment, and the extension route, with your bank. Doing it afterwards means arguing from a position you have already given away.