Trade finance basics: letters of credit, documentary collection and advance payment

Agree payment as part of the transaction

Payment terms determine when money moves and which risks each party accepts. A buyer may want evidence of delivery before paying, while a supplier may need payment certainty before producing or shipping goods.

Three common approaches are letters of credit, documentary collection and advance payment. None should be selected only because it is familiar. Consider the counterparty, order, documents, route and the practical advice of your bank.

ATP does not handle payments between users or provide trade finance. It is a platform only. Buyers and suppliers agree price, payment, delivery and returns directly; ATP’s only income is annual subscriptions, with no commission on trade.

Letters of credit

A documentary letter of credit is a bank undertaking to pay against a complying presentation of the documents it requires, subject to its terms. The buyer arranges issuance, and the supplier should review the conditions with its bank before relying on it.

The focus is documentary compliance, not a bank inspection of product quality. An LC does not replace agreed specifications, inspection arrangements or a clear sales agreement.

Ask whether the required documents are practical to produce, who pays fees, and how expiry and shipment dates work. Discuss issuing-bank and country risk with your bank, including whether confirmation is appropriate. Do not assume a scanned LC message is genuine; use bank authentication.

Prepare before production

Give your bank the draft transaction terms and proposed document list early. Resolve unclear conditions before shipping. A supplier should not commit to deadlines or documents it cannot meet merely because an LC is described as secure.

Documentary collection

With documentary collection, banks handle documents under collection instructions. In documents against payment, or D/P, release is conditional on payment under the instructions. In documents against acceptance, or D/A, documents are released against acceptance of an obligation to pay later.

Banks do not provide the same payment undertaking as under an LC. A buyer may decline to pay or accept, and a deferred obligation still carries non-payment risk.

Ask your bank whether document control is effective for the chosen shipment and what happens if the buyer refuses. Understand storage, return or alternative-sale options before dispatch, rather than assuming the goods will remain easy to recover.

Advance payment

Under advance payment, the buyer pays an agreed amount before the relevant production or shipment milestone. This can reduce the supplier’s non-payment exposure but increases the buyer’s exposure to non-performance.

Agree what triggers payment and what happens if the supplier cannot perform. Verify beneficiary details and assess the supplier before transferring money. A small successful payment or sample order does not eliminate risk on a larger order.

The parties may discuss staged payments or other arrangements with their bank and advisers. Do not call a direct advance payment portal-protected; ATP does not hold the funds or provide escrow.

Compare the practical questions

Before choosing an approach, ask:

• When must the buyer pay, and when can the supplier expect funds?
• Which bank obligations exist, and which risks remain?
• What documents are required and who can issue them?
• What happens if documents are discrepant or payment is refused?
• Who bears bank charges and exchange-rate exposure?
• How do payment dates interact with production and shipping?

Request a clear explanation of costs and conditions from your bank. Rates, availability, processing times and suitability are [TO CONFIRM] for your transaction.

Keep documents and terms aligned

Identify the final quotation, contracting businesses, currency, amount and delivery terms. Payment wording should align with the invoice and other agreed documents. Agree changes explicitly and have the bank assess any affected instrument.

Keep commercial discussions in ATP, where email addresses and phone numbers are hidden. Deal stages describe progress; Deal Agreed or Closed is not confirmation from a bank that funds are available.

Sources and further reading

See the International Trade Administration’s explanations of letters of credit, documentary collections and advance payment. Sources checked on 30 September 2026. Discuss transaction-specific choices with your own bank.

Next step: State your proposed payment terms in a buying request.