Getting paid: advance, LC, DA and DP

How you are paid decides who carries the risk. At one end the buyer pays before you ship; at the other you ship and wait. In between, banks hold the documents that control the goods until the buyer pays or promises to pay.

• Advance payment: the buyer pays, in full or in part, before you ship.
• Letter of credit (LC): the buyer's bank promises to pay you when you present documents that match the credit's terms.
• Documents against payment (DP): you ship, and your bank sends the documents to the buyer's bank, which hands them over only when the buyer pays.
• Documents against acceptance (DA): the buyer's bank hands over the documents when the buyer accepts a bill of exchange, a promise to pay on a set later date.

Open account, where you ship and send the documents straight to the buyer, carries the most risk of all. Keep it for buyers who have paid you on time before.

• Advance: almost none for you. The importer carries it all and must trust you to ship.
• LC: low for you if your documents comply and the issuing bank is sound. The importer pays against documents, before seeing the goods.
• DP: the buyer can refuse to pay and leave your goods at a foreign port, but cannot take them without paying.
• DA: the highest of the four for you. The buyer has the goods and may not pay on the due date.

Most letters of credit today are issued subject to UCP 600, the ICC's rules for documentary credits, in force since 1 July 2007. Collections such as DP and DA have their own ICC rules, URC 522. In a collection the banks pass on documents and money; they do not promise that the buyer will pay.

1. 1You ship and collect the transport document, the invoice, the packing list and any certificate the buyer needs.
2. 2You hand them to your bank with its request letter: the LC or collection terms, whether documents are released against payment or acceptance, and the buyer's bank.
3. 3Your bank sends them to the buyer's bank, which releases them on the agreed terms.
4. 4The money comes back through your bank, which records it against your shipping bill in EDPMS.

• Take an export advance and the balance through the same bank. To switch banks, tell both.
• Be paid within 9 months of shipment, or 12 months if the export is invoiced or settled in rupees. Your bank can extend this if you explain the delay.
• If an export stays unpaid more than a year past its due date, you may export further only against full advance payment or an irrevocable letter of credit.
• On the import side, your bank decides whether to allow an advance, and can ask for a standby letter of credit or a guarantee above an amount it sets.

• Screen the buyer, its bank and anyone else in the deal against sanctions lists.
• Confirm the company exists: its registration in its own country, its address and website, and its LEI if it has one.
• Look for its import history. Customs records, where a country publishes them, show whether it really buys your kind of goods.
• Start with an advance or an LC, and move to DP or DA only after a few orders paid on time.
• Ask about export credit insurance. ECGC, a Government of India company, insures exporters against buyers who do not pay.