Payment method selection directly shapes risk allocation between buyer and seller in a commodity transaction. This guide covers the eleven most common payment instruments used in international trade, from telegraphic transfer to documentary letters of credit and SWIFT-based instruments.
Payment Methods in Commodity Trading
The choice of payment method in a commodity transaction directly shapes how risk is allocated between buyer and seller — determining who bears the greater exposure until goods and funds change hands. Methods range from open account terms that favor the buyer to cash-in-advance arrangements that favor the seller, with documentary and bank-guaranteed instruments occupying the middle ground. The appropriate method depends on factors including the parties' trading history, the value and nature of the commodity, country risk, and market convention for that product. Whichever method is chosen, it must be explicitly specified in the Sales and Purchase Agreement (SPA), along with the precise terms governing its issuance, presentation, and settlement, to avoid ambiguity or dispute during execution.
TT — Telegraphic Transfer
A Telegraphic Transfer is an electronic funds transfer sent directly from the buyer's bank to the seller's bank, typically via the SWIFT network. It is fast, straightforward, and low-cost compared to documentary instruments, but it offers limited built-in protection: funds move independently of any verification that goods have shipped or match specification. TT is often used for a deposit or partial payment alongside another instrument, or for the full amount when the parties have an established, trusted trading relationship. Sellers accepting TT-only terms, particularly TT after shipment, carry more collection risk than under a letter of credit.
Advance Payment
Advance payment requires the buyer to pay the seller, in whole or in part, before production, allocation, or shipment of the goods begins. It is the most seller-favorable arrangement, effectively eliminating the seller's payment risk while placing performance risk entirely on the buyer, who must trust that the seller will deliver as agreed. Sellers commonly request advance payment from new or unverified buyers, for custom or made-to-order goods, or in markets with limited legal recourse. Buyers typically seek to offset this risk through supplier due diligence, staged payments tied to milestones, or a performance guarantee from the seller's bank.
Open Account
Under open account terms, the seller ships the goods and provides documentation directly to the buyer, invoicing for payment at a later agreed date — commonly 30, 60, or 90 days after shipment or delivery. This is the most buyer-favorable arrangement, since the buyer receives and can inspect or resell the goods before payment is due, while the seller carries full credit risk until funds are received. Open account terms are typically reserved for long-standing trading relationships with a strong payment history, or supported by trade credit insurance or a factoring arrangement to mitigate the seller's exposure.
CAD — Cash Against Documents
Cash Against Documents is a payment method in which the seller ships the goods and forwards the shipping documents to a bank in the buyer's country, which releases them to the buyer only upon payment in full. This gives the seller assurance that documents — and therefore the ability to claim the goods — will not be handed over without payment, while the buyer avoids paying before documents confirming shipment exist. CAD sits between open account and a letter of credit in risk allocation: it is simpler and less costly than an LC, but does not involve a bank's payment guarantee, so the seller still relies on the buyer's willingness to pay upon presentation.
D/P — Documents against Payment
Documents against Payment is a collection arrangement, closely related to CAD, in which the seller's bank forwards shipping documents to the buyer's bank with instructions to release them only when the buyer pays the stated amount. The buyer's bank acts as an intermediary controlling document release but does not guarantee payment itself, unlike a letter of credit. D/P protects the seller from releasing title to the goods without receiving funds, while giving the buyer the assurance of paying only once shipment has genuinely occurred and documents are available for inspection.
D/A — Documents against Acceptance
Documents against Acceptance is a variant of the documentary collection in which the buyer's bank releases shipping documents to the buyer upon the buyer's formal acceptance of a time draft (bill of exchange), rather than upon immediate payment. This allows the buyer to take possession of the goods before the payment due date, effectively extending credit from the seller. D/A carries more risk for the seller than D/P, since the buyer gains control of the goods before paying, and collection ultimately depends on the buyer honoring the accepted draft at maturity.
LC / DLC — Documentary Letter of Credit
A Documentary Letter of Credit is a payment undertaking issued by the buyer's bank, guaranteeing payment to the seller provided the seller presents documents that strictly comply with the terms specified in the credit. This substitutes the bank's creditworthiness for the buyer's, significantly reducing the seller's payment risk while giving the buyer assurance that payment is released only against the agreed documentary evidence of shipment. The LC is one of the most widely used instruments in international commodity trade for parties without an established trading history, though it requires careful, precise document preparation, since even minor discrepancies can delay or prevent payment.
SBLC — Standby Letter of Credit
A Standby Letter of Credit functions as a secondary payment guarantee rather than the primary settlement instrument: it is drawn upon only if the buyer fails to pay through the agreed primary method. Issued by the buyer's bank in the seller's favor, it provides the seller with a fallback source of payment, giving added security without changing the day-to-day payment mechanics of the transaction. SBLCs are often used to support long-term supply agreements or open account arrangements, reassuring the seller of payment even under adverse circumstances, without the transactional overhead of a documentary LC for every shipment.
BG — Bank Guarantee
A Bank Guarantee is an unconditional promise from a bank to pay a specified sum to the beneficiary if the party it guarantees fails to fulfill a contractual obligation. In commodity trading, bank guarantees are used to secure performance obligations — such as a seller's commitment to deliver goods, or a buyer's commitment to pay — rather than to serve as the primary payment mechanism itself. A performance guarantee protects the buyer against non-delivery, while a payment guarantee protects the seller against non-payment, and either can be called upon by the beneficiary if the counterparty defaults on the underlying obligation.
MT799 — SWIFT Pre-Advice Message
An MT799 is a free-format SWIFT message used between banks, typically to provide a pre-advice or confirmation of a buyer's financial capability or intent to issue a payment instrument, ahead of the formal instrument itself. It is not a payment or a binding financial commitment — it functions as a communication or comfort message between banks, often requested by a seller as preliminary evidence of the buyer's banking arrangements before proceeding further in a transaction. Because an MT799 carries no independent payment obligation, sellers should treat it as supporting information rather than a guarantee of funds.
MT760 / MT103 — SWIFT Guarantee and Payment Messages
An MT760 is the SWIFT message format banks use to formally issue or confirm a bank guarantee or standby letter of credit, giving it authenticated, verifiable form within the interbank messaging system. An MT103 is the SWIFT message format used to execute an actual funds transfer between banks — the message a beneficiary's bank receives confirming that payment has been sent. Together, these two message types represent the formal backbone of bank-mediated trade finance: the MT760 evidences a guarantee or credit instrument, while the MT103 evidences the movement of real funds, and neither should be confused with informal claims of fund availability that are not verifiable directly through the issuing bank.