International trade uses four basic methods of payment. They differ in one thing: whether the goods or the money move first, and what part a bank plays. Two of them — the documentary credit and the documentary collection — follow uniform rules of the International Chamber of Commerce (ICC).

In brief

  • With advance payment the buyer carries the risk; with open account the seller does. Credits and collections sit between the two.
  • A documentary credit is a bank's undertaking to pay against documents that comply with its terms. It is governed by UCP 600.
  • In a collection the bank only releases the documents against payment or acceptance of a bill of exchange. It gives no undertaking to pay. It is governed by URC 522.
  • In both, banks deal with documents, not with goods.

Advance payment and open account

  • Advance payment. The buyer pays before the goods are shipped. Until delivery the buyer holds nothing but the contract.
  • Open account. The seller ships the goods and issues an invoice with a due date. Until payment the seller has no security other than what the parties agreed separately.

Documentary credit (UCP 600)

  • The buyer's bank undertakes to pay the seller on presentation of the documents the credit specifies — usually an invoice, a transport document and an insurance document.
  • A credit is irrevocable even if it does not say so (Article 3).
  • It is independent of the sales contract. The bank does not examine the goods or the performance of the contract (Articles 4 and 5).
  • The bank has at most five banking days following the day of presentation to examine the documents (Article 14).
  • The bank may refuse documents that do not comply.
  • A confirmed credit adds the undertaking of a second bank, usually in the seller's country (Article 8).

Documentary collection (URC 522)

  • The seller hands the documents to its bank with an instruction on the terms under which the bank in the buyer's country is to release them.
  • D/P (documents against payment): the buyer receives the documents only on payment.
  • D/A (documents against acceptance): the buyer receives the documents on accepting a bill of exchange payable later.
  • Banks act on instructions. They do not guarantee that the buyer will pay or accept the bill.

What is often confused

  • A credit does not guarantee the quality of the goods. The bank pays against documents; a dispute about the goods is settled under the sales contract.
  • Under a D/A collection the buyer obtains the documents — and with them, as a rule, the goods — before paying.
  • A bank guarantee and a standby letter of credit are different instruments. Under them the bank pays only when the debtor fails to perform.