When you place a first order with a supplier on the other side of the world, two parties are each worried about the same thing from opposite directions.
You don't want to pay for goods that never arrive, or arrive wrong. They don't want to ship goods and never get paid.
The payment method you agree decides which of you carries that risk. There are four main options, and the right one depends almost entirely on how much you trust each other and how much the order is worth.
1. Advance payment (cash in advance)
You pay before the goods ship. Common for first orders, small orders, and suppliers with strong negotiating positions.
Risk sits entirely with you. You have paid for goods you haven't seen, from a company you may never have met, in a jurisdiction where pursuing a dispute may be impractical.
When it's reasonable: small first orders where the downside is survivable; established suppliers you've dealt with for years; markets where it's simply the convention and alternatives aren't on offer.
How to reduce the risk: split it. A 30% deposit on order and 70% against a Bill of Lading copy is extremely common and considerably safer than paying everything upfront. It gives the supplier working capital to produce and gives you evidence that goods have actually shipped before the balance leaves.
Also: verify who you're paying. Confirm bank details by phone to a known contact, not from an email. Invoice redirection fraud targets exactly this situation — a first-time payment to an unfamiliar overseas account is the ideal cover for a fraudster.
2. Open account
The supplier ships and invoices you, and you pay on agreed terms — 30, 60, 90 days after shipment or delivery.
Risk sits entirely with the supplier. They've parted with goods and are relying on you to pay.
When it happens: established relationships, strong buyers with good credit, and competitive markets where suppliers offer terms to win business.
Why you want it: it's the best possible outcome for your cash flow. The goods can be sold before the supplier is paid, which dramatically shortens your working capital cycle.
The trade-off: suppliers who fund you usually price it in. Terms are rarely free; they're built into the unit cost. Worth asking what the price would be for payment on shipment — occasionally the discount exceeds the cost of funding it yourself through a trade facility.
3. Documentary collection
The middle ground, and the one most businesses have never heard of.
The supplier ships the goods and sends the documents — including the Bill of Lading, which is what you need to collect the goods — to their bank. That bank sends them to your bank. Your bank releases the documents to you either against payment (documents against payment) or against your acceptance of a term draft (documents against acceptance).
Risk is shared. The supplier keeps control of the goods via the documents until you've paid or formally committed to pay. You don't release funds until documents proving shipment exist.
What it doesn't do: it does not guarantee you anything about the quality or quantity of the goods. Documents can be in order while the contents of the container are not. Nor is there a bank guarantee of payment.
Cost: modest bank handling fees. Considerably cheaper than a letter of credit.
When it fits: a developing relationship where neither side wants the full cost of an LC but neither is comfortable with open account.
4. Letter of credit
A bank undertaking. Your bank — the issuing bank — commits to pay the supplier provided they present documents complying exactly with the terms set out in the credit.
Risk is substantially mitigated for both sides, and replaced by a different risk: documentary compliance. The supplier gets paid only if the documents match the credit precisely. A discrepancy as small as an inconsistent description or a late presentation can mean non-payment pending your waiver.
What it costs: issuance fees, amendment fees, confirmation fees where the supplier wants their own bank to add its undertaking, and — importantly — it typically consumes part of your banking facility. An LC ties up credit capacity you might otherwise use elsewhere.
When it's worth it: large orders, new suppliers in unfamiliar jurisdictions, high-value capital equipment, markets where it's expected, and situations where your supplier needs the credit to obtain their own production financing.
When it isn't: routine repeat orders with established suppliers, where the cost and administration far exceed the risk being covered.
The currency question sits on top of all four
Whichever method you use, the currency exposure is separate and usually unmanaged.
Advance payment: you convert now, at a known rate. Simplest case.
Open account at 90 days: you have 90 days of exposure between agreeing the price and paying it. This is the textbook forward contract scenario.
Documentary collection: exposure from shipment to document presentation and payment, typically a few weeks.
Letter of credit: exposure from issuance to presentation, potentially months, and the amount is fixed in the credit's currency.
The payment method determines when you'll convert. It says nothing about at what rate. Those are two separate decisions and the second one is the one businesses forget.
A practical progression
Most supplier relationships evolve along a predictable path:
First order: deposit plus balance against Bill of Lading
Established: documentary collection or larger deposit splits
Trusted, significant volume: open account terms, negotiated
Large capital orders at any stage: letter of credit
Knowing where you are on that path, and asking to move along it, is a straightforward commercial conversation that many businesses never initiate. Suppliers expect it. The ones who value your volume will usually move.
William Fuller, Co-Founder of Orbis Exchange Group contact on 0203 918 5622
Ben James, Co-Founder of Orbis Exchange Group contact on 0203 918 5621