Payment terms: who carries the risk

Payment terms decide who is exposed if the other side fails to perform. They sit on a spectrum from 'seller takes all the risk' to 'buyer takes all the risk', and the right point depends on how much the two parties trust each other.

1. 1Open account — seller ships and bills; buyer pays later. Cheap and simple, but the seller carries the full risk of non-payment. Used between trusted, long-standing partners.
2. 2Documentary collection (D/P) — Documents against Payment: the buyer's bank releases the shipping documents only when the buyer pays. The seller keeps control of the cargo until then.
3. 3Documentary collection (D/A) — Documents against Acceptance: documents are released when the buyer accepts (signs a promise to pay later). The seller gives up the goods against a promise, not cash.
4. 4Letter of credit — a bank guarantees payment against compliant documents. Risk shifts from the buyer onto a bank. The standard for new or cross-border relationships.
5. 5Cash in advance / prepayment — buyer pays before shipment; now the buyer carries the risk that the seller doesn't perform.