Every commodity contract answers one question before any other: who is exposed, and for how long? The seller does not want to ship unpaid; the buyer does not want to pay for a cargo it has not seen. Each payment term below splits that risk differently. None of them removes it.
The four terms at a glance
| Term | What triggers payment | Bank's role | Seller's risk | Buyer's risk |
|---|---|---|---|---|
| Letter of credit (LC) | Documents that comply with the credit | The issuing bank undertakes to pay | Low, if documents comply | Pays against documents, not goods |
| Documents against payment (D/P) | Buyer pays to collect the documents | Banks pass documents; no undertaking | Buyer may refuse the documents | Low |
| Cash against documents (CAD) | Buyer pays on presentation of documents | As D/P, or none if presented directly | As D/P | Low |
| Telegraphic transfer (TT) | Whatever the contract says: in advance, on copy documents, or on arrival | Transfers funds only | High if paid after shipment | High if paid in advance |
Letter of credit
A documentary letter of credit is a bank's own undertaking to pay the seller, provided the seller presents the documents the credit asks for, on time and without discrepancy. Almost all credits are issued subject to UCP 600, the International Chamber of Commerce rules. The points that matter in practice:
- Irrevocable by default. Under UCP 600 a credit is irrevocable even if it does not say so.
- Banks deal in documents. The bank examines the bill of lading, invoice and certificates on their face. It does not check the cargo. A buyer's protection is therefore the list of documents it asks for, above all an independent inspection certificate.
- Five banking days. A bank has a maximum of five banking days after presentation to decide whether the documents comply.
- Quantity tolerance. For bulk goods not counted in units or packages, UCP 600 allows 5% more or less, provided the amount drawn does not exceed the credit. The words "about" or "approximately" allow 10%.
- Sight or usance. At sight, the bank pays on compliant documents. A usance credit pays at a fixed term, such as 90 days after the bill of lading date, and the seller can usually discount it.
- Confirmation. A confirmed credit adds the undertaking of a second bank, normally in the seller's country. Sellers ask for it when the issuing bank or its country is a risk they will not carry.
- Transferable credits. A credit marked transferable can be passed in whole or part to a second beneficiary, which is how a trading company pays its supplier from the buyer's credit. It has to be issued as transferable; it cannot be made so afterwards.
The usual reason an LC fails is a discrepancy: a late shipment date, a certificate that does not match the wording, a misspelt name. Agree the document list and the exact wording before the credit is opened, and ask for a draft.
Documentary collection: D/P and D/A
In a collection the seller ships, then sends the documents through its bank to the buyer's bank with instructions. Collections run under the ICC's URC 522 rules.
- Documents against payment (D/P). The buyer's bank releases the documents only when the buyer pays. Without the original bill of lading the buyer cannot take the cargo.
- Documents against acceptance (D/A). The bank releases the documents when the buyer accepts a bill of exchange payable at a later date. The seller has given credit and holds only the buyer's promise.
The banks in a collection act as agents. They give no undertaking to pay. If the buyer does not take up the documents, the seller owns a cargo at a foreign port, running demurrage or storage, and must find another buyer or ship it back. D/P is therefore used between parties who have traded before, or for goods the seller could resell at that destination.
Cash against documents
CAD is used loosely. In many markets it means the same as D/P at sight through banks. In others the seller, its agent or a courier presents the documents to the buyer directly and is paid by transfer on the spot, with no collection rules behind it. Ask which is meant, where the documents will be presented, and how many days the buyer has to pay.
Telegraphic transfer
TT is a bank transfer, and the risk depends entirely on timing:
- Advance TT. The buyer pays before shipment. The buyer carries the whole risk. Reasonable for a deposit; unsafe for full value with a counterparty you have not verified.
- Part advance, balance against copy documents. A common container-trade term: 10 to 30% with the order, the balance when the seller emails a copy of the bill of lading, after which the originals are released. The seller's exposure is the balance; the buyer's is the deposit.
- TT after arrival or open account. The seller carries the whole risk and has in effect lent the buyer the cargo.
Which term for which trade
- First trade, bulk cargo, or any vessel parcel: irrevocable LC at sight from a bank the seller accepts, confirmed where asked.
- Repeat container business between known parties: deposit by TT and balance D/P or against copy documents.
- Small trial lots: TT, with the deposit sized to what each side can afford to lose.
The form on our quote page asks for the payment term and the bank that will open the credit, because a producer will not reserve tonnage without them.
What a payment term cannot do
No payment term proves the cargo is good. An LC pays against paper; a collection releases paper. Quality and quantity are settled by the inspection clause, covered in our guide to inspection and sampling. Delivery and risk are settled by the Incoterm, covered in the guide to Incoterms for bulk commodities.
How CBIL works
CBIL is a commodity brokerage company. The buyer pays the seller under the contract between them, normally by letter of credit for vessel cargoes and by TT and collection for containers. We do not issue, arrange, lease or monetise bank instruments of any kind, and a requirement built around one is declined.
Request a quote and state the payment term and your bank with the requirement.