Negotiating Payment Terms in International Trade: LC, TT, and Open Account Compared

If you’re new to importing or exporting, one question will come up faster than almost any other: “How do I actually get paid — or make sure I actually get what I paid for?”

Unlike a local sale, where you can meet the other party face to face, inspect the goods, and sort out a dispute in a familiar court if something goes wrong, international trade adds distance, different legal systems, currency risk, and — most importantly — a trust gap between two parties who may have never met. Payment terms exist to close that gap. They decide who bears the risk, when money changes hands, and how much control each side has over the transaction.

There are many ways to structure payment in cross-border trade, but three options come up again and again for beginners: the Letter of Credit (LC), the Telegraphic Transfer (TT), and the Open Account. This guide walks through what each one means, how they compare, and how to think about negotiating them — without assuming you already know the jargon.

Why Payment Terms Matter So Much in International Trade

Before comparing the three methods, it helps to understand the core tension they’re all trying to solve.

In a purely domestic sale, if a buyer doesn’t pay, the seller can usually chase them down through a familiar legal system. In international trade, the seller (exporter) might be shipping goods to a buyer (importer) in a country with different laws, different courts, and sometimes different levels of financial stability. The exporter naturally wants to be paid before — or as close as possible to — the moment they hand over the goods. The importer, on the other hand, doesn’t want to pay for something they haven’t received or verified, especially when the shipment could take weeks to arrive.

This is often called the risk spectrum of trade finance. On one end, the exporter carries almost all the risk. On the other, the importer does. Every payment method sits somewhere along that spectrum, and negotiating payment terms is really about negotiating where on that spectrum both parties are comfortable landing.

A simple way to picture it:

Most risk for exporter → Open Account → Documentary Collection → Letter of Credit → Cash in Advance → Most risk for importer

TT (telegraphic transfer) isn’t a fixed point on this spectrum by itself — it’s simply the method of sending money electronically, and it’s often used alongside the other arrangements (for example, an advance TT payment, or a TT payment upon presentation of documents). We’ll unpack that distinction below.

What Is a Letter of Credit (LC)?

A Letter of Credit is a written promise from the importer’s bank (called the issuing bank) to pay the exporter, provided the exporter presents a specific set of documents proving the goods were shipped exactly as agreed. Those documents typically include a commercial invoice, a bill of lading (proof the goods were loaded onto a ship or handed to a carrier), a packing list, and sometimes an inspection or insurance certificate.

Here’s the appeal of an LC in plain terms: the exporter isn’t relying on the importer’s promise to pay — they’re relying on a bank’s promise. Banks are generally more creditworthy and predictable than an unfamiliar overseas buyer, which is why LCs are popular for large transactions, first-time trading relationships, or trade with countries where currency controls or political risk are a concern.

How an LC Transaction Typically Works

The buyer and seller agree on terms, including that payment will be by LC.
The buyer applies to their bank (the issuing bank) to open the LC in the seller’s favor.
The issuing bank sends the LC to a bank in the seller’s country (the advising or confirming bank), which notifies the seller.
The seller ships the goods and gathers the required documents.
The seller presents those documents to their bank.
If the documents match the LC’s requirements exactly, the bank arranges payment.

That phrase — “match the LC’s requirements exactly” — is the single most important thing to understand about LCs. Banks deal in documents, not in goods. If there’s a mismatch (a wrong date, a misspelled company name, a missing signature), the bank can refuse payment even if the actual shipment was perfect. This is known as a “discrepancy,” and it’s the most common source of frustration with LCs for beginners.

Advantages of an LC

Strong security for the exporter, since payment is backed by a bank rather than the buyer alone.
Reduces the importer’s risk too, since payment only happens once shipping documents are verified — the importer isn’t just trusting the exporter to actually ship the goods.
Useful for building trust in a brand-new trading relationship, or in markets where enforcement of contracts is uncertain.

Drawbacks of an LC

Costly. Banks charge fees for opening, advising, confirming, and amending LCs, and these costs can add up, especially for smaller shipments.
Slow and paperwork-heavy. Any discrepancy in documents can delay payment or require costly amendments.
Ties up the importer’s credit line or cash, since many banks require the buyer to have funds or credit available to back the LC.
Not well suited to small, frequent, low-value transactions — the overhead outweighs the benefit.

What Is a TT (Telegraphic Transfer)?

A Telegraphic Transfer — often just called a wire transfer or bank transfer — is simply the electronic movement of money from the buyer’s bank account to the seller’s bank account. The word “telegraphic” is a holdover from the days when these transfers used telegraph lines; today it just means a direct, relatively fast international bank transfer, commonly sent through the SWIFT network.

It’s important to understand that TT is a payment mechanism, not a risk-sharing structure. It tells you how the money moves, not when it moves relative to the shipment. That timing is what actually determines the risk, and it’s usually described using terms like:

TT in advance (also called cash in advance or advance payment): The buyer pays before the goods are shipped, sometimes with a deposit and balance structure (for example, 30% deposit, 70% before shipment). This is the safest option for the exporter and the riskiest for the importer, because the buyer is trusting the seller to actually ship the agreed goods after being paid.
TT against documents / TT on shipment: The buyer pays once shipping documents are presented, often through a bank acting as an intermediary (this overlaps with what’s known as a documentary collection).
TT after delivery: The buyer pays a set number of days after receiving the goods. This shifts most of the risk onto the exporter, since the goods have already left their control.

Many small and mid-sized businesses favor TT because it’s cheap, fast, and simple compared to an LC. The tradeoff is that TT on its own carries no built-in guarantee — its safety depends entirely on the payment timing you negotiate and how much you trust the other party.

Advantages of TT

Low cost — usually just a modest bank transfer fee, compared to the layered fees of an LC.
Fast — funds often arrive within one to a few business days, depending on the countries and banks involved.
Simple — no complex document requirements or bank conditions to satisfy.
Flexible — can be structured many ways (deposit plus balance, staged payments, and so on).

Drawbacks of TT

Little inherent protection. If the timing favors one party heavily (full advance payment, or full payment after delivery), the other party is taking on real risk.
No bank guarantee of performance — the bank simply moves money; it doesn’t verify that goods were shipped or match a contract.
Once sent, an international wire transfer is difficult or impossible to reverse if something goes wrong or if fraud is involved.

What Is Open Account?

Open Account trading means the exporter ships the goods and sends an invoice, and the importer agrees to pay by an agreed future date — commonly 30, 60, or 90 days after shipment or invoice. In other words, the goods and the accompanying paperwork arrive before any money changes hands.

This is essentially the international trade version of “invoice now, pay later,” and it places the most risk on the exporter of the three methods discussed here. The exporter has to trust that a buyer they may never have met, in another country, under another legal system, will pay on time once the goods are already gone.

So why would any exporter agree to this? Because Open Account is also the most buyer-friendly, competitive, and relationship-building option — and in mature trading relationships, it’s actually the norm rather than the exception.

When Open Account Makes Sense

The buyer and seller have a long, trusted trading history.
The exporter is trying to win business in a competitive market where buyers expect flexible credit terms (open account is standard in many industries and regions).
The exporter has taken steps to manage the risk — for example, by using trade credit insurance, factoring, or checking the buyer’s credit history.
The transaction values are modest enough that the exporter is comfortable with the exposure.

Advantages of Open Account

Most competitive and attractive option for buyers, which can help exporters win business.
Simple and low-cost — no bank fees for documentary handling.
Builds and reflects trust in an ongoing commercial relationship.
Fast for the buyer to receive and use goods without tying up cash upfront.

Drawbacks of Open Account

Highest risk for the exporter — there’s no guarantee of payment beyond the buyer’s promise.
Cash flow strain for the exporter, who has to fund production and shipping without being paid yet.
Limited recourse if the buyer delays, disputes the invoice, or simply doesn’t pay.
Often needs to be paired with risk-mitigation tools (credit insurance, credit checks, or export factoring) to be used responsibly.

Side-by-Side Comparison

Feature	Letter of Credit (LC)	TT (Telegraphic Transfer)	Open Account
Who bears more risk	Shared, weighted toward buyer verification	Depends entirely on agreed timing	Exporter (seller)
Speed	Slower, document-heavy	Fast	Fast, but payment is delayed by agreed credit period
Cost	Highest (multiple bank fees)	Low	Low
Paperwork	Extensive and strict	Minimal	Minimal
Best suited for	New relationships, large transactions, higher-risk markets	Flexible use across many relationship types	Established, trusted relationships
Payment guarantee	Backed by issuing bank	None inherent — just a transfer method	None — based on buyer’s promise

How to Think About Negotiating These Terms

Negotiating payment terms isn’t about finding the objectively “best” method — it’s about finding the point on the risk spectrum where both sides are comfortable, given how well they know each other and what’s at stake. Here are a few practical ideas to guide that conversation.

Start by being honest about the relationship. If this is your first transaction with a new overseas partner, it’s completely reasonable — and common practice — to ask for more security, such as an LC or a TT deposit in advance. As trust builds over several successful transactions, terms often relax toward TT on shipment, and eventually toward Open Account.

Consider a hybrid approach. Many real-world deals blend these tools rather than picking just one. A common structure is a partial deposit by TT before production begins, with the balance paid by TT or LC against shipping documents. This spreads the risk more evenly than an all-or-nothing approach.

Factor in cost versus protection. An LC gives strong protection but comes with real fees that can eat into margins, especially on smaller deals. It often makes the most sense for higher-value shipments where the cost of the LC is small relative to the transaction, or where the buyer or country carries meaningfully higher risk.

Don’t negotiate payment terms in isolation. Payment terms are closely tied to other parts of the deal — price, delivery timeline, and who’s responsible for shipping and insurance (commonly described through Incoterms like FOB or CIF). A buyer asking for longer payment terms might be open to a slightly higher price, for example, to offset the exporter’s added risk.

Use available tools to manage risk on either side. Exporters extending Open Account terms can look into trade credit insurance or export factoring, which can protect against non-payment. Importers uneasy about paying in advance can ask for a smaller deposit paired with an inspection certificate before the balance is released. Neither party has to choose between “fully protected but expensive” and “cheap but risky” — there’s a lot of middle ground.

Get the details in writing, clearly. Whatever method you land on, make sure the payment terms are spelled out precisely in the sales contract: the amount, currency, timing, and — for an LC — the exact documents required. Vague terms are one of the most common sources of disputes in international trade.

Final Thoughts

There’s no universal “right” payment method in international trade — only the method that fits a given relationship, transaction size, and comfort level with risk. A Letter of Credit offers strong protection but comes at a real cost in time and money. TT is fast and cheap but only as safe as the timing you negotiate around it. Open Account is the most buyer-friendly and common between established partners, but it asks the exporter to extend real trust.

If you’re just starting out in international trade, the most useful thing you can do is understand where each method sits on the risk spectrum and enter negotiations with a clear sense of what you’re comfortable with — and what the other side might reasonably need in order to feel secure too. Over time, as trading relationships mature, terms tend to evolve naturally toward more efficient, lower-friction arrangements. Every long-standing trade relationship you’ll come across started with a first, more cautious deal — and that’s exactly the right place to begin.