This article sets out how each structure works and what it protects. It is not banking or legal advice. Charges, availability and the credit assessment behind any facility are matters for your own bank; the contractual wording is a matter for your own legal adviser.

The problem each structure is solving

A first import is two strangers taking opposite risks at the same time. You are asked to send money to a company you have not visited, for goods you have not seen. The Indian exporter is asked to buy material, run a line and put a container on a vessel for a buyer they have not met, on the promise that payment follows once the goods are outside their control.

Every structure below is a different answer to who moves first, and how much of the risk a bank will stand in the middle of.

The four structures compared

There is no correct row, only the row that matches the size of the order, the length of the relationship and what your treasury will tolerate.

How a documentary credit actually works, and where it goes wrong

A documentary credit is a bank’s undertaking to pay the seller against a presentation of documents that comply with the terms of the credit. On a first container it does the most work, and it is the structure buyers understand least well.

Two articles of UCP 600 explain almost everything about how it behaves. Article 4 provides that a credit by its nature is a separate transaction from the sale or other contract on which it may be based. Article 5 provides that banks deal with documents and not with goods, services or performance to which the documents may relate.

The consequence is one most first-time buyers find uncomfortable. A documentary credit does not guarantee that the goods are right. It guarantees that a compliant set of documents will be paid. If the documents comply and the plates are the wrong colour, the bank pays. If the documents do not comply and the plates are perfect, the bank can refuse.

That is why the credit terms are a specification exercise, not a banking formality. What you control is what the credit demands: an inspection certificate from a named inspector, a packing list in a stated format, a certificate of origin from an authorised issuing agency, a bill of lading marked in a particular way, a latest shipment date, and a goods description that matches the contract.

The mechanics that govern the timetable after shipment:

• Article 14(b) gives each bank a maximum of five banking days following the day of presentation to determine whether a presentation is compliant.
• Article 14(c) requires a presentation including one or more original transport documents to be made not later than 21 calendar days after the date of shipment, and in any event not later than the expiry date of the credit.
• Article 16 requires a bank refusing a presentation to give a single notice stating each discrepancy and what it is doing with the documents.

The most common failure is discrepancy, not fraud. Documents prepared by four parties at four different times, reconciled by nobody, produce a mismatch; the bank raises it; the seller corrects and re-presents; the goods sit. If the container has already arrived, demurrage runs against your landed cost while the paperwork is fixed, which is one reason that line matters in a landed cost model for a first container. The defence is unglamorous: agree the exact wording of every required document before the credit is issued, and circulate a specimen of each. Amendments after issuance cost money and time on both sides.

Documentary collection: the option nobody explains

A documentary collection sits between a credit and open account, and it is frequently the right answer on a second or third order.

The seller ships, then hands the documents to their bank, which forwards them to your bank with instructions. Under documents against payment, your bank releases them when you pay. Under documents against acceptance, it releases them when you accept a term bill of exchange, giving you a credit period. Without the documents you cannot take delivery.

The rules are the ICC Uniform Rules for Collections, URC 522, in force since 1 January 1996. The critical difference from a credit is that the banks act as agents handling documents and neither guarantees payment. This suits a buyer who has taken at least one successful shipment and wants lower bank cost than a credit. It does not suit a first shipment from an unverified supplier, because it protects you less than a credit while still costing you bank charges.

Advance payment: why it is asked for, and what it costs you

An Indian manufacturer quoting a first order will frequently ask for a deposit with the balance before or against shipping documents. That is not a warning sign in itself. Leaf tableware is made to order against a raw material bought seasonally, and a deposit funds the material and the line time.

What matters is proportion and structure. A deposit that funds material and production, with the balance payable against a compliant document set, keeps both parties honest. A demand for the full value in advance on a first container from an unverified supplier transfers the entire risk to you and leaves a foreign court as your only remedy.

The Indian side has regulatory constraints that shape what a supplier can agree to. Under the Reserve Bank of India’s Master Direction on Export of Goods and Services, export proceeds must be realised and repatriated to India within nine months from the date of export for all exporters. Where an exporter receives an advance, shipment must be made within a stated period from receipt, and the shipping documents must be routed through the same authorised dealer bank that received the advance.

So your supplier cannot informally offer a very long credit period, because their own regulator sets a realisation window. And the bank channel is not interchangeable: paying into an account at a different bank from the one handling the export documents creates an administrative problem at the Indian end that becomes your delay.

Before any advance leaves your account, run the checks in how to verify an Indian exporter before you send money. The deposit is the moment verification stops being optional.

Open account: when a supplier can genuinely offer it

Open account means you receive the goods and pay on agreed terms afterwards, with the seller carrying all the credit risk.

A manufacturer can offer it once the relationship has a payment history, the order pattern is predictable enough to plan material against, and the exposure fits inside whatever credit insurance or receivables facility the exporter holds. Some Indian exporters can extend it from the second or third order; some cannot extend it at all, and that is a function of their own financing rather than their opinion of you. Ask at the negotiation stage rather than assuming it appears later.

How terms typically move across the first three orders

This is a pattern, not a promise, and every supplier relationship differs.

What moves the terms is not negotiation. It is a completed cycle in which the goods arrived as specified and the money moved when it was supposed to. Buyers who push hard for open account on order one usually get a price for it instead, because the supplier prices the risk they are being asked to carry.

Bank charges: what to ask, and what not to assume

Do not accept any figure for bank charges from a supplier, a forwarder or an article. Charges vary by bank, country, facility and relationship, and they are quoted on request. Ask your own bank, in writing, before you commit to a structure:

1. The issuance charge for a documentary credit at your intended value, and whether it is a flat fee or a percentage.
2. Amendment charges, and how many amendments are typical on a first credit.
3. Discrepancy charges and who bears them under your draft credit wording.
4. Whether the seller is likely to request confirmation by a bank in India or Europe, and what confirmation would cost.
5. Charges for a documentary collection, both documents against payment and documents against acceptance.
6. The cost of the outward payment itself, and the correspondent bank charges on the route.
7. Which charges are for the applicant’s account and which for the beneficiary’s, because this is negotiable and it should be stated in the credit.

Point 7 causes the most disputes. “All charges outside the issuing bank’s country are for the beneficiary’s account” is a common formulation, and if it is not agreed in advance it turns up as a deduction on the supplier’s proceeds and then as a conversation you did not want.

Currency: which side carries the movement

If you buy in US dollars or Indian rupees, you carry the currency movement between quotation and payment. If you buy in euro or sterling, the supplier carries it and prices that risk into the number. The gap between quotation and payment on a container order with a production lead time can run to months, which is one of the three inputs behind why a tableware quotation expires. Agree the quotation currency at the same time as the payment structure, not separately.

Which buyer should choose which

That last row is the honest one. Direct import requires you to fund material, production and a sea voyage before you sell anything. If that working capital is not available, a European stockist holding inventory is a better answer than any payment structure, whatever the unit price difference.

Frequently asked questions

Related reading

• How to verify an Indian exporter before you send money
• Contract terms that protect a European buyer on a first import
• Certificate of origin: what it proves and who issues it
• Why a tableware quotation expires: currency, freight and leaf season

References