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Trade finance explainer
The main ways an international trade gets paid, from bank-backed letters of credit to open account. See who each method protects, when to use it, and the risk it leaves on each side. Free, no account.
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How traders get paid, explained.
The main ways to settle and finance an international trade, from bank-backed letters of credit to open account and receivables finance. Pick one to see who it protects, when to use it, and the risk on each side.
Payment methods
Guarantees & security
Financing the trade
Letter of Credit (Documentary Credit)
Cost: HighA bank undertakes to pay the seller once the seller presents documents that comply exactly with the terms of the credit.
- Who it protects
- Both sides. The seller is assured of payment on a compliant presentation; the buyer pays only against proof of shipment.
- When to use it
- New relationships, higher-risk markets, or large one-off shipments where both sides want a bank in the middle.
- Risk to the buyer
- Pays bank fees and ties up a credit line; the goods could still differ from the documents.
- Risk to the seller
- Must present perfectly compliant documents, or payment is delayed or refused.
Rule of thumb: the higher the counterparty risk, the more security you want - a Letter of Credit or cash in advance. The more trust you have built, the cheaper you can go - a documentary collection or open account. When the wait for payment is the problem, finance the receivable.
Draft the documents each method needs.
Invoices, letters of intent, and offers, with the payment method built in - free in the document builder.