Author: Saman Memarpour

Introduction

Payment methods are the heart of international trading.

Even if buyer and seller agree on price, quantity, and shipment, the deal cannot proceed without a payment structure that protects both sides.

This lesson teaches you:

• The most common international trade payment methods
• When each method should be used
• Risks for both buyer and seller
• Professional examples
• Real-world recommendations
  
  

Understanding payment methods separates beginners from professional traders.

1. TT – Telegraphic Transfer (Bank Wire Transfer)

What It Is:

A direct bank-to-bank money transfer.

Two common TT structures

• TT 30/70: 30% upfront → 70% after documents
• TT after inspection: Buyer pays after SGS or equivalent inspection.

Advantage

For seller:

✔ Fast

✔ Simple

✔ No bank compliance issues

sFor buyer

✔ Low banking fees

✔ Quick processing

Disadvantage

For seller:

❌ Buyer may refuse to pay the remaining amount

❌ High risk if shipment is large

sFor buyer

❌ Difficult to recover funds if the seller fails to deliver

❌ Not safe for first-time transactions

When TT is recommended

• Repeat business with trusted partners
• Small orders (e.g., < 2,000 MT)
• Local/domestic trading
• When both parties know each other well

2. LC – Letter of Credit (Irrevocable LC / ILC)

What It Is:

A bank guarantee that payment will be made to the seller if they comply with the contract and present the correct documents.

Key Points

• The bank—not the buyer—guarantees payment
• Payment is made only when the seller submits the required documents (BL, CI, COO, SGS, etc.).

Advantage

For seller:

✔ Very safe—bank guarantees payment

✔ Reduces risk of fraud

sFor buyer

✔ Payment is only made after shipment documents

✔ Ensures seller performs contract terms

Disadvantage

For seller:

❌ Document errors can delay payment

❌ Slow processing

For buyer:

❌ High bank fees (LC opening charges)

❌ Requires a strong credit rating

When LC is recommended

• First-time deals
• High-value shipments
• Government contracts
• When the buyer and seller want maximum security

3. SBLC – Standby Letter of Credit



What It Is:

A financial guarantee instrument used as a safety net.

SBLC is not typically used for direct payments, but it ensures that if the buyer fails to pay, the seller can claim funds from the bank.

Advantage

✔ High security

✔ Seller protected from non-payment

✔ Buyer pays only when documents are correct

Disadvantage

❌ High banking cost

❌ Requires a strong banking relationship

❌ Takes time to issue

When SBLC is used

• Large commodity deals (urea, sugar, metals, petroleum products)
• Long-term contracts
• When a buyer wants credit terms
• When the seller requires strong assurance

4. DLC – Documentary Letter of Credit

What It Is:

A type of LC where payment is made against documents, not performance.

Documents may include

• Bill of Lading (BL)
• Certificate of Origin
• Commercial Invoice
• Inspection certificates
• Packing List

Advantage

✔ Protects both sides

✔ Faster processing than standard LC

✔ Guarantees payment if documents are correct

Disadvantage

❌ Requires exact documents

❌ Bank fees and strict compliance

When DLC is recommended

• Medium to large shipments
• When the buyer and seller want a balance of speed and safety

5. CAD – Cash Against Documents

What It Is:

The buyer pays only after receiving shipping documents from the seller’s bank.

Advantage

✔ Buyer does not pay before shipment

✔ Seller retains control of documents until payment

✔ Lower bank fees than LC

Disadvantage

❌ Still risky for the seller if the buyer refuses payment

❌ Not suitable for large contracts

When CAD is recommended

• Medium-risk markets
• Existing business relationships
• Small to medium shipments

6. Escrow Service

What It Is:

A safe intermediary service where an independent third party holds the funds until both buyer and seller fulfill their obligations.

Advantage

✔ Highest security for both sides

✔ Neutral third party

✔ Protects against fraud

Disadvantage

❌ High service fees

❌ Slower than TT

❌ Not commonly used in bulk commodity trading

When Escrow is recommended

• New trading partners
• High-risk markets
• Online B2B marketplaces
• Non-bulk commodities

8. Which Payment Method Should You Use as a Professional Trader?

For first-time deals:

✔ LC

✔ SBLC

✔ Escrow (for smaller shipments)

For repeat clients

✔ TT 30/70

✔ CAD

For long-term annual contracts

✔ SBLC

✔ DLC

For small, fast-moving trades

✔ TT after inspection

9. Common Mistakes Traders Make With Payment Methods

Mistake 1: Asking the seller for POP before the contract/payment

Professional sellers never release POP before secure payment terms are met.

Mistake 2: Using TT with a seller you don’t know

This is how inexperienced traders lose money.

Mistake 3: Choosing LC but not understanding the strict document rule

One missing comma = bank rejects payment.

Mistake 4: Buyer wants CIF with TT

This is extremely risky for the seller → most will refuse.

Mistake 5: Confusing SBLC with DL

SBLC is a guarantee instrument; DLC is a payment instrument.

10. Practical Examples



• Scenario A: New buyer–seller relationship

       Recommended: LC / SBLC

• Scenario B: Buyer has a low credit rating

        Recommended: TT (partial) or CAD

• Scenario C: Large annual contract

      Recommended: SBLC securing the full year

• Scenario D: Small monthly shipment

      Recommended: TT 30/70 or CAD

What Comes Next?

In the following lessons, you will learn:



Lesson 9 – Incoterms Overview:

Understanding Risk, Responsibility, Cost, and Delivery Points

(All 11 Incoterms 2020)