A seller who has shipped and not been paid has lost the goods and the money. A buyer who has paid and not received has lost the money and has no goods. Payment terms exist to decide which of those risks sits where, and how much machinery is worth building to reduce it.
The spectrum
| Term | Mechanism | Exposed party |
|---|---|---|
| T/T in advance | Bank transfer before shipment | Buyer, fully |
| Partial advance | A deposit before shipment, balance against documents | Shared, in the agreed proportion |
| T/T against documents | Payment on presentation of copy documents, before originals are released | Seller, briefly |
| Documentary collection (D/P) | Banks exchange documents for payment, without guaranteeing it | Seller — the bank handles, it does not undertake |
| Documentary credit (L/C) | A bank undertakes to pay against compliant documents | Neither, substantially — the bank stands between |
| Open account | Ship now, invoice, settle on terms | Seller, fully |
T/T is not one term
Most of this trade settles by telegraphic transfer, and it is worth noticing that "T/T" covers positions at opposite ends of the risk spectrum. T/T in advance puts everything on the buyer. T/T on open account terms puts everything on the seller. The phrase alone says nothing.
What makes T/T workable in practice is the middle of that range — a deposit on confirmation, the balance against copy documents before originals are released. The seller retains control of the cargo via the bill of lading until the balance is settled, and the buyer has not funded the whole shipment before it exists.
Control of the goods is the real security.
Whoever holds the original bill of lading controls the cargo. Most T/T structures in this trade are really arrangements about when that document changes hands, with the money following it. Understand the document flow and the payment term explains itself.
What a documentary credit actually buys
Under a letter of credit, a bank undertakes to pay the seller against documents that comply with the credit's terms. The buyer's creditworthiness is replaced by the bank's, which is the whole point. The ICC's UCP 600 governs how these are interpreted internationally.
Two things are commonly misunderstood:
- The bank deals in documents, not goods. It pays against a compliant presentation. It does not inspect the cargo, and a credit does not protect a buyer against receiving the wrong material — that is what the specification and the inspection clause are for.
- Compliance is strict. A discrepancy a commercial party would consider trivial can be grounds for rejecting the presentation. Credits generate their own category of delay, separate from anything that happens to the cargo.
Credits also cost money — issuance, advising, confirmation where required, amendments — and the cost falls somewhere in the price. For a shipment of modest value against an established relationship, the machinery can easily cost more than the risk it removes.
Documentary collection sits in between
In a documentary collection — D/P, documents against payment — banks handle the exchange of documents for payment under the ICC's URC 522, but no bank undertakes to pay. If the buyer declines to take up the documents, the seller has a container at a foreign port and a problem.
It is cheaper than a credit and offers less. It suits counterparties who trust each other enough not to need a bank undertaking, but want the document flow handled formally.
Why a first shipment is structured differently
This is not a judgement about the counterparty. It is arithmetic about information.
On a first transaction neither side has evidence about the other beyond what can be checked externally. The terms that get agreed reflect that absence — a deposit, a tighter document flow, sometimes a smaller first lot than either side wants. As shipments complete without incident, the information exists, and terms loosen because the risk being priced has actually fallen.
A supplier who demands full advance payment on the tenth shipment is telling you something. So is a buyer who asks for open account on the first.
Agreeing terms without friction
- State the payment term in the offer, not after the specification is agreed. It is part of the price, not an administrative detail.
- Keep it separate from the Incoterm. CIF says nothing about when payment is due; these are independent questions that are frequently conflated.
- If a credit is required, agree its terms before it is issued. Amendments are slow and chargeable.
- Say what you need and why. A buyer explaining that their internal process requires a credit is easier to accommodate than one who simply insists.
This note describes commercial practice in the fibre trade. It is not financial or legal advice; the terms of any particular transaction are a matter for the parties and their banks.
We work on a T/T basis, with other terms open to discussion. The document flow that every payment structure is built around is covered in what arrives with a shipment.