The delivery of the goods sold in international trade, the payment of the price, and the occurrence of risks vary according to the delivery and payment methods accepted between the parties. The issue of which party the payment methods and the risk are mostly against is directly related to the payment methods and the costs of the goods delivery. Both the buyer and the seller want to trade without taking risks, but because of the cost of each choice, payment methods in international trade have diversified.

ADVANCE PAYMENT (Cash Payment/ Prepayment/Cash Before Delivery)

Advance payment; It means that the cost of the goods is paid before the actual export of the goods. In other words, the cost of the goods is paid by the importer to the exporter in advance before the delivery of the goods either through a bank or in other ways. 

RISK: This type of payment is the most convenient form of payment for the exporter. However, it is the riskiest type of payment for the importer.

Methods that can be used in advance payment:

  1. Money order, check, effective payment, etc. (Payment by bank transfer, check or cash)
  2. Prefinancing (It means that the buyer finances the seller before exporting). The buyer claims a guarantee from the seller’s bank. Pre-financing guarantees; are issued as a condition of a” RED CLAUSE ” letter of credit or addressed to the foreign bank that directly provides the prefinance outside the letter of credit.  In this payment method, if the export is not realized, the bank guarantees the repayment of the pre-financing currency on time. In this context, it should be taken into account that the bank will request collateral from its customer to be pre-financed. The name of the recipient is written in the consignee part of the advance payment system because by paying the price of the goods in advance, the buyer will gain the property of the goods.  In the case of a situation such as prolongation of the shipment of goods; the buyer is deprived of the interest that s/he would use if s/he kept the money himself. Although there is an opinion that it is not possible to transfer the advance amount to the third party, it can be transferred to the intermediary companies by agreement.
  3. Red clause letter of credit (red clause letter of credit): Based on a special provision specified in the letter of credit order, the correspondent bank makes the advance payment without presenting the exporter shipping documents to it. It received such a name because these terms were indicated in red in the past. It can be paid in whole or in part. This letter of credit gives its beneficiary the right to withdraw in advance the portion indicated with the red condition. The payment is made in return for the commitment to purchase and ship the goods subject to the letter of credit and to submit the documents suitable for the transportation conditions in due time.

If the exporter does not load and does not repay the advance, the correspondent bank asks the issuing bank to repay the advance amount along with the interest, in the same way, the issuing bank will request the importer. Therefore, the risks and costs will belong to the buyer.

If the buyer does not find the commitment of the seller sufficient, s/he may impose a payment condition against the bank guarantee that the advance payment will be refunded if the shipment is not made.

  1. Green clause letter of credit: (green clause letter of credit) In this form of payment, the goods are first delivered to a third party, usually on behalf of the bank, with a warehouse delivery receipt, and an advance can be received after this receipt is given to the bank. In the warehouse delivery receipt, the value of the goods is determined, so the risk is reduced, albeit slightly.

Since the party that opens the red clause letter of credit will be at risk; although a letter of guarantee is not given by the user of the letter of credit in favor of the bank that issues the letter of credit; this risk is tried to be reduced with the green clause letter of credit.

Even if the risk is tried to be reduced, it will remain on the buyer. In the periods when the interest rate in the exporting country is higher than the interest rate in the importing country, the loan financing method is chosen in this way.

The issue that reduces the risk in advance payment: “Down Payment Guarantee” (down payment guarantee)

This system applies if the money has been paid by the buyer before the goods have been shipped. This system appears when the buyer wants to eliminate the risk that s/he will face if the goods for which s/he has paid in advance are not sent by the seller.

If the item is not shipped by the seller, the buyer can request a “Down-Payment Guarantee” from the seller’s bank.  This payment guarantee is in the form of a letter of guarantee that includes the commitment to pay the buyer with the interest if the goods are not shipped. Therefore; if the buyer cannot buy the goods, s/he has the right to demand the price s/he paid in advance by recourse to the “advance payment guarantee”.

– this warranty is not transferable

– the guarantee is only taken by banks.


In this method of payment, the cost of the goods is paid after delivery by the importer. This method of payment is the most advantageous for the importer and the riskiest for the exporter. In shipment on consignment (shipment on consignment), the cost of the goods is paid after the sale, so it can be evaluated in this payment system.

Risk: There is a risk that the cost of the goods will not be paid, as payment will occur after the goods are delivered in this way of payment. Making a contract is recommended.

The seller, who wants to make a transaction with cash against goods method and not take risks, may request a payment guarantee to guarantee that the price will be paid before shipping the goods. Besides, if the buyer wishes, the bank may request a bank bill, in which case the payment will be made cash against goods with acceptance credit.

CASH AGAINST DOCUMENTS (Documentary Collections)

In the cash against documents; a sales contract is made between the seller and the buyer and accordingly; the seller sends the goods and then gives the documents representing the goods to his bank (sending bank for collection) for collection, and this bank sends the documents submitted by the seller to its correspondent abroad (collection or presentation bank) by attaching it to a collection order.

– The buyer is authorized to examine the documents in the bank before making the payment. However, a prior inspection of the goods is not allowed unless the seller has SPECIAL PERMISSION.

– Unless the seller has permission, the collecting bank cannot deliver the documents to the buyer in return for partial payment.

Documents can be delivered to the recipient in one of the following ways:

  • Document against payment submission (document against payment)
  • Document against policy acceptance (document against acceptance)
  • Document against letter of undertaking (document against letter of undertaking)
  • Delivery of documents against payment guarantee (documents against payment guarantee) 

Risk: In this type of payment, it is not possible to control the amount and type of goods. 


It is a form of payment that undertakes to pay the cost of the goods in a certain term and in which a policy is a tool for this payment. This form of payment can be done as:

Letter of credit 

– Cash against documents

– Cash against goods 

A-Acceptance of Letter of Credit: (Acceptance L/C)In the letter of credit opened per international rules and legislation; the seller undertakes to pay deferred payment to the buyer, and foresees the acceptance of the policy drawn by the beneficiary in return for the documents with the condition to submit the letter of credit. In such letters of credit, if the policy is accepted or issued, the liabilities of the bank arising from the letter of credit are terminated and the liability continues over the policy. These letters of credit may also be confirmed or unconfirmed. 

-The problem may arise whether the policy is valid or not.

-It is necessary to stipulate the letter of credit.

In the approved letter of credit; documents are delivered if they meet the terms of the letter of credit.

B-The Acceptance Of Credit Against Documents: (documents against acceptance) In this form of payment; the seller grants the buyer a term for payment, wants to guarantee the cost of documents and receives the payment at the end of a certain period. It is a form of payment in which the cost of the goods is paid to the seller at the term of the policy after the bank’s delivery documents are delivered by the buyer following the acceptance of the policy attached to these documents by the buyer.

The objective is for the seller to give the buyer due for payment.

– The seller draws a policy on the buyer to guarantee the payment and gives it to his bank together with the documents.  The bank checks the policy and referral documents, and if it deems appropriate, it may stipulate that the letter of instruction and documents be submitted to the buyer bank in return for policy acceptance.

-Besides, the seller can also request the bank’s bill if s/he wishes.

C-The Acceptance of Credit Against Goods: It is a form of payment in which the cost of the exported goods is received by the importer and the payment is made at the term of the policy after the importer accepts the policy. 

-Some risks are frequently encountered in payments with acceptance credit. The goods may have been purchased, but the policy fee may not have been paid or the goods may not have been accepted at all. Such situations pose a risk to the seller. To prevent such a situation;

  • The seller may put forward a condition of acceptance of the policy by a bank in the country of the buyer. Thus, the buyer will have paid the policy amount to the bank before the end of the term.
  • Another risk is although the buyer has solvency, s/he may not be able to pay the policy price in respect of the relevant country law. In this case, the seller bank may be obliged to ask the seller for instructions on what to do in case of such possibilities before receiving the documents. Since these will extend the process, the contract should be prepared considering the possibilities and the bank should be instructed.


A letter of credit is a payment method that requires the exporter to be paid by the bank if the conditions agreed upon from the beginning are fulfilled. It should be clearly stated which documents will be made in the letter of credit agreement.  These documents must contain referral documents. In letter of credit, banks only process documents, they do not see the goods.

-Risk factor in insurance

-Whether to accept partial loading and transfer

-How many days after the document will be submitted

-The risk can be reduced by setting conditions regarding the delivery method, loading and unloading places, etc.

Letter of credit by type:

Revocable Letter of Credit: These types of letters of credit are risky, the issuing bank can change the terms and conditions of the letter of credit. Changes can be made without notifying the beneficiary.

-These letters of credit cannot be opened as confirmed and transferable.

-There is no guarantee that the bank in the respective country will pay or not.

Irrevocable Letters of Credit: 

It is the most common type of letter of credit in practice. The letter of credit cannot be changed or canceled before its due date without the consent of the beneficiary.  Although the issuing bank is intended to secure the payment, the correspondent bank in the seller’s country is not guaranteed to make the payment. Therefore, this type of letter of credit can be made more secure by adding a confirmation condition.

-It creates assurance for the seller.

-It includes a commitment for final payment if there are documents that comply with the document requirements specified in the letter of credit.


When the letter of credit is confirmed; If the documents and other documents do not comply with the letter of credit requirement; the payment is suspended and the bank warns the seller and requests that the documents be made appropriate.

– In this context, the beneficiary provides two assurances, both from the issuing bank and the verification bank, and can make the presentation to the bank of his/her choice.


-If the letter of credit is demand; the correspondent bank will make the payment as specified in the letter of credit

-If the credit is due; correspondent bank payment to be made at the maturity

– If the letter of credit requires policy acceptance, the addressee bank is responsible for the acceptance and payment of the policies drawn on the confirming bank as the addressee.


If the letter of credit is unconfirmed; the notification bank sends the documents to the issuing bank and pays the beneficiary according to the payment order from the issuing bank.

-Nothing is done here other than just checking the authenticity of the reported letter of credit. An unconfirmed notification process takes place.

By payment type:

  • Deferred
  • Acceptance Credit
  • Paid in Sight Document 
  • Mixed Payment
  • Negotiation

Special letters of credit 

  • Revolving
  • Red Clause, Green Clause
  • Back-to-Back 
  • Transferrable
  • Stand-by –is related to the purchase and sale of services. (These issues will be examined in our next article.)


In a general letter of credit application, an average of 5-10% underloading is allowed in the amount of goods and unit price.

-The amount of goods must be stipulated in the letter of credit

-It should not be transferred in the form of INDEPENDENT pieces from each other

-If partial pieces go to the same address with different cargo, this is not considered partially.

Attorney Burcu SOLMAZ L.LM,

University of Hertfordshire

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