Payment terms for importing towels from India — T/T, letter of credit and collection compared
In short. How a bank transfer, a letter of credit and a documentary collection share risk between buyer and exporter on a first towel order, and how to choose.
On a first order, the payment term decides who is exposed at each stage: the buyer before the goods ship, or the exporter after they have. There is no payment term that protects both sides completely. The useful question is which risk you are better placed to carry, and which instrument fits the size of the order and how well you know the supplier.
This guide compares the three structures a towel importer is most likely to be offered: a bank transfer (T/T), a letter of credit (L/C) and a documentary collection. It describes how each works in general. It does not state what any one supplier will accept; that is agreed per order.
Bank transfer (T/T)
A telegraphic transfer is an ordinary international bank payment, usually sent through the SWIFT network. It is a way of moving money, not a guarantee: no bank promises that anything will be delivered or paid.
That makes the timing the whole of the risk:
- Paid before shipment: the buyer carries the risk that the goods are late, wrong or never arrive.
- Paid after shipment or arrival: the exporter carries the risk of not being paid.
Because neither side wants all of it, first orders are often split: a deposit when the order is confirmed and the balance at a later agreed point, such as before the goods leave or against copies of the shipping documents. That split is a common arrangement, not a rule, and the percentages are negotiated.
Letter of credit (L/C)
A letter of credit is a bank's undertaking to pay the exporter, provided the exporter presents documents that comply with the credit's terms. The rules most credits follow are the ICC's Uniform Customs and Practice for Documentary Credits, UCP 600, under which a credit is irrevocable. A confirmed credit adds a second undertaking from a bank in the exporter's country.
Two points matter more than the rest:
- Banks examine documents, not goods. Payment is triggered by documents that match the credit, not by the towels being right. An L/C therefore protects the exporter's payment and gives the buyer very little protection about quality. Quality is protected by the approved sample and the pre-shipment checks, not by the instrument.
- A small mismatch can hold up payment. An invoice description that differs from the credit's wording, or documents presented after the allowed period, are discrepancies. Under UCP 600 the default period for presenting documents is 21 calendar days after shipment, within the credit's own expiry. Discrepancies delay payment and attract bank charges, so the credit's wording needs to be checked against what the exporter can actually supply before it is issued.
An L/C costs the most of the three structures and takes more administration, which is why it tends to suit larger orders or relationships where neither party wants to rely on trust alone.
Documentary collection
In a documentary collection the exporter ships the goods and sends the shipping documents through banks, which hand them to the buyer under the ICC's Uniform Rules for Collections, URC 522. The banks act as agents; they do not guarantee payment.
There are two forms:
- Documents against payment (D/P): the buyer receives the documents only when they pay.
- Documents against acceptance (D/A): the buyer receives the documents when they accept a time draft, and pays later. If the buyer then fails to pay, the exporter has already released the goods.
A collection costs less than an L/C and gives the exporter control of the documents until payment, but it does not guarantee that the buyer will take delivery. For the buyer, payment is against documents, so the goods are usually not inspected before the money moves. It suits a relationship that already has some history.
Side by side
| T/T paid in advance | T/T paid after arrival | Letter of credit | Documentary collection (D/P) | |
|---|---|---|---|---|
| Exporter is paid | Before shipment | After arrival | On compliant documents | When the buyer pays for the documents |
| Buyer's main risk | Goods not delivered or wrong | Little | Documents compliant, goods may not be | Pays against documents before seeing the goods |
| Exporter's main risk | Little | Non-payment | Document discrepancies | Buyer does not pay or collect |
| Bank cost | Low | Low | Highest | Moderate |
| Suits | A small trial order | A buyer with an established record | A larger order or a new relationship | A relationship with some history |
A worked example of who is exposed when
Take a hypothetical order of 20,000 US dollars on FOB terms, and a split of a 30 per cent deposit with the balance before shipment. The deposit is 6,000 dollars and the balance 14,000 dollars. Before production starts, the exporter has been paid 30 per cent and the buyer has put 6,000 dollars at risk. Before the goods leave, the buyer has put the full 20,000 dollars at risk, which is why a pre-shipment sample check matters at exactly that point. Our guide to reading a pre-shipment sample covers what to check before releasing the balance.
Under an L/C for the same order, the buyer's money is not released until the exporter presents compliant documents, but the buyer still has no say over whether the towels match the sample. The two protections work on different things.
Choosing between them
- A first order, a modest value, a supplier you have not used before: a deposit and a balance tied to an agreed point, with the sample approved first, is a common structure. Pair it with an approved physical sample and a pre-shipment check.
- A larger order, or one where your bank or company requires it: a letter of credit, written carefully, with the wording checked against what the exporter can supply.
- A repeat order with a supplier who has delivered to specification before: the terms can usually become lighter, but that is agreed between the two parties.
What this guide does not cover
It does not cover foreign exchange regulations, taxes, sanctions screening or the particular rules of your bank or country. Each of those can limit which structures are open to you, so confirm the mechanism with your bank before you commit to it. Our guide to what FOB means explains where the exporter's responsibility ends and yours begins.
What to ask a supplier
- Which payment structures can be agreed for a first order?
- If a deposit is requested, what is it for, and when is the balance due?
- If a letter of credit is used, who prepares the documents and how are they checked against the credit's wording?
- Which documents are issued with the shipment: commercial invoice, packing list and certificate of origin?
- What happens to the payment schedule if the pre-shipment sample is not approved?
Tell us the quantity, the destination and the payment structure your bank or company allows, and our export team will confirm which terms can be agreed for your order alongside the quotation.