Payment terms are not a finance detail added after the price. They decide who funds the transaction, who carries the risk of non-payment or non-delivery, and which documents have to be right before money moves. The right structure depends on the relationship, the documentation and the jurisdiction, not on a default clause copied from another deal.

Payment Terms Are Risk Allocation

Payment terms allocate four risks: buyer default, seller non-performance, country or bank disruption, and document failure. Each structure shifts those risks, and the price should reflect the shift rather than pretending it does not exist.

An advance payment protects the seller and exposes the buyer to non-delivery. Open account protects the buyer and exposes the seller to non-payment. A letter of credit shifts the focus to documents but adds cost and discrepancy risk. A documentary collection sits between the two, with the bank handling documents but not guaranteeing payment.

The structure should match the transaction. A first order to a new buyer in a difficult jurisdiction is a different risk from a repeat order to a long-standing distributor. A used unit with a condition file is a different risk from a new device with a manufacturer\’s warranty. The terms should be chosen deliberately, not inherited from a template. The regulatory context varies by market, from FDA rules and the EU Medical Device Regulation 2017/745 to MHRA, TGA and PMDA requirements, while WHO guidance frames the shared principles; the payment terms should not assume that the regulatory file is complete.

Advance Payment: Who Carries What

Advance payment puts the funding risk on the buyer. The buyer pays before shipment and relies on the seller\’s performance, the contract and any security. It is common for first orders, custom configurations and sellers with limited access to credit.

The buyer\’s protection comes from the contract and the evidence, not from the payment method. A deposit should be tied to a verifiable milestone, such as a signed inspection certificate or a shipping booking, and the balance should be released against documents or delivery. A deposit paid against a promise is an unsecured loan in commercial clothing.

The seller should also consider whether an advance payment creates a performance obligation it can meet. Taking funds before the unit is ready, or before the export documents are available, can turn a commercial advantage into a dispute. The payment schedule should follow the seller\’s actual ability to perform. A deposit should not be so large that the buyer loses leverage, or so small that the seller funds the entire build. The split should reflect who bears the cost of a cancelled order.

Letters of Credit and Their Traps

A letter of credit is a bank\’s undertaking to pay against complying documents. It reduces the seller\’s dependence on the buyer\’s credit, but it replaces that risk with documentary risk: a discrepancy can stop payment even when the goods are correct.

The LC is governed by its own terms and, where incorporated, the ICC\’s UCP 600. The seller should check the document list, the description of goods, the latest shipment date, the presentation period and the expiry before accepting the LC. A clause that requires a document the seller cannot obtain is a payment trap, not a formality.

The buyer should also check that the LC terms match the underlying contract. An LC that requires a certificate the seller never agreed to issue, or a shipment date that the factory cannot meet, creates a dispute before the first container moves. The cost of an amendment is usually lower than the cost of a failed presentation. The seller should also check who issues the LC and whether the issuing bank is acceptable. A confirmed LC adds a second bank\’s undertaking but also cost. An unconfirmed LC from a bank in a weak jurisdiction may not be worth the paper, and the seller should price or decline the risk.

Documentary Collections

A documentary collection uses banks to forward documents and collect payment or acceptance. It is cheaper than an LC, but the bank does not guarantee payment; the buyer can refuse the documents, and the seller may have to recover or resell the goods.

In a documents-against-payment collection, the buyer pays to receive the documents. In a documents-against-acceptance collection, the buyer accepts a draft and receives the documents, leaving the seller with a credit exposure. The second structure is closer to open account than to an LC, and it should be priced accordingly.

The seller should confirm the collecting bank, the presenting bank, the governing collection rules and the procedure if the buyer refuses. A collection that leaves the goods at the port with no clear return route can cost more than the bank fee saved. The seller should also check whether the buyer\’s bank is willing to act as collecting bank and whether the documents will be released against payment or acceptance. A collection instruction that is ambiguous about release can leave the goods in limbo.

Open Account and Credit Limits

Open account means the seller ships first and invoices later. It is the most buyer-friendly structure and the most seller-risky, and it works when the relationship, the credit history and the legal recovery route support it.

The seller should set a credit limit, a payment period and a stop-supply rule, and it should monitor the buyer\’s payment behavior. Credit insurance or a guarantee can transfer part of the risk, but it does not replace the need to assess the buyer and the country.

For used equipment, open account is harder to justify because the unit is often unique and difficult to resell if the buyer defaults. A deposit, a retention or a security can bring the risk back into balance without requiring a full LC.

Milestone and Retention Structures

Milestone structures split payment across verifiable events: order, inspection, shipment, delivery, installation and acceptance. Retention keeps a final portion until the unit has performed for an agreed period.

Each milestone should have a document and a decision rule. \”Shipment\” should mean a bill of lading or equivalent, not a promise to ship. \”Acceptance\” should mean a signed certificate against defined criteria, not the absence of a complaint. A milestone without any evidence is, in practice, a payment on trust.

Retention is useful for used equipment because it keeps the seller engaged after delivery. It should be long enough to cover the acceptance test and short enough that the seller is not financing the buyer indefinitely. The release condition should be written before the first payment, not negotiated at the end. The retention amount should reflect the cost of a failed acceptance, not a round percentage copied from another deal. If the unit is difficult to remove or reinstall, the retention should cover that cost. If the seller is unlikely to return to the site, a cash retention may be more useful than a repair promise.

Currency and Settlement Timing

Currency and settlement timing affect the real value of the payment. The parties should state the currency, the exchange-rate mechanism if any, the bank charges and the value date, and they should confirm that the payment route is open before shipment.

Correspondent banking, sanctions screening and anti-money-laundering checks can delay or block a payment even when the commercial documents are correct. The seller should confirm the receiving bank and the intermediary route, and the buyer should confirm that its bank can execute the payment in the required currency.

Where payment is tied to documents, the presentation period matters. A document presented after the LC expiry, or after the stated period, can be refused even if it is otherwise correct. The timeline should be built backwards from the shipment date, not left to the forwarder\’s schedule. The seller should also consider the timing of the currency conversion. A payment received in one currency and converted later carries exchange risk that may exceed the margin. A forward contract or a currency clause can reduce it, but both add cost and should be priced into the offer.

Choosing a Structure

Choose the structure by matching four variables: the relationship, the documentation, the jurisdiction and the unit value. A repeat buyer with a clean payment history can support open account; a first buyer in a restricted jurisdiction may need an LC or advance payment.

The payment file should hold the contract, the invoice, the payment instruction, the bank confirmations and the documents that triggered each release. The exporting guide covers the logistics sequence, and the Knowledge section has related contract and records guides.

If you are structuring payment terms for an export and want the risk allocation reviewed before signature, send the draft to the HHG team.

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