What Are the Five Methods of Payment?

1. Cash in Advance

Cash in advance means the buyer pays the seller before the goods are shipped. This is the safest payment method for the exporter because the money is received before the goods leave the seller’s control.

For example, a U.S. manufacturer selling machinery to a buyer in Brazil may require a 100% wire transfer before production begins. If the buyer pays $50,000 upfront, the exporter can use that money to buy materials and ship the equipment without worrying about nonpayment.

The main drawback is that buyers may hesitate to pay before receiving the goods. They risk losing money if the seller fails to deliver, ships poor-quality products, or delays the order. For this reason, cash in advance is most common when the buyer and seller already trust each other or when the seller has limited credit options.

2. Letters of Credit

A letter of credit is a written promise from the buyer’s bank to pay the seller after the seller meets the agreed conditions. The bank pays only when the exporter provides the required documents, such as a bill of lading, invoice, packing list, and insurance certificate.

For example, a textile exporter in India may ship garments to a retailer in Germany under a letter of credit. Once the exporter presents the correct shipping documents to the bank, the bank releases payment according to the agreement.

This method protects both sides. The exporter knows a bank is committed to paying, while the buyer knows payment will be made only after proof of shipment. Letters of credit are often used for large international orders, new business relationships, or countries with higher payment risk. The downside is that they can be costly and require careful document preparation.

3. Documentary Collections

A documentary collection is a payment method in which banks help exchange shipping documents for payment. The seller sends documents through its bank to the buyer’s bank, and the buyer receives the documents only after paying or accepting a promise to pay later.

For example, a furniture exporter in Vietnam may use a documentary collection to ship products to a buyer in Canada. The Canadian buyer receives the shipping documents after paying the invoice or signing an agreement to pay on a future date.

There are two common types. In documents against payment, the buyer pays immediately to receive the documents. In documents against acceptance, the buyer accepts a time draft and pays later, such as 60 days after shipment.

Documentary collections are usually cheaper than letters of credit because banks do not guarantee payment. However, they carry more risk for the exporter, especially if the buyer refuses to pay after the goods arrive.

4. Open Account

An open account allows the buyer to receive the goods first and pay later. The seller ships the products and sends an invoice, while the buyer pays within an agreed period, often 30, 60, or 90 days.

For example, a U.S. electronics company may sell smartphone accessories to a distributor in Mexico on 60-day terms. The distributor receives the products, sells them to retailers, and pays the U.S. company within two months.

This method is attractive to buyers because it improves cash flow. They can sell the goods before paying the supplier. However, it creates the highest credit risk for the exporter because payment depends entirely on the buyer’s willingness and ability to pay.

Open accounts work best between companies with a strong history of successful transactions. Exporters can reduce risk by using trade credit insurance, credit checks, or export financing.

5. Consignment

Consignment means the exporter sends goods to a foreign distributor but keeps ownership until the goods are sold. The distributor sells the products and pays the exporter afterward, usually based on the sales price or a pre-agreed rate.

For example, an American clothing brand may send 5,000 shirts to a distributor in Japan on consignment. The Japanese distributor displays and sells the shirts, then pays the U.S. brand for the items sold each month.

This method can help a company enter a new market without requiring the distributor to pay upfront. It also gives the exporter more control over pricing and inventory. However, it is the riskiest method for the exporter because payment is uncertain until the goods sell.

Consignment is best for products with steady demand, trusted local partners, and a clear agreement covering storage, insurance, unsold inventory, and payment schedules.

How to Choose the Right Payment Method

The right payment method depends on trust, transaction size, buyer creditworthiness, and risk tolerance. Cash in advance protects the seller most, while open account and consignment benefit the buyer most.

For a first-time international sale, a letter of credit may be the best choice because it offers bank-backed security. For repeat orders with a reliable customer, an open account may be more practical and competitive. Documentary collections can work well when both sides want lower banking costs than a letter of credit but still want documents to control the release of goods.

Before choosing, businesses should review the buyer’s payment history, country risk, currency rules, shipping terms, and the cost of financing. A clear written contract is essential for every method because it defines payment timing, documents required, dispute procedures, and responsibility for shipping and insurance.

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