Open Account vs Advance Payment vs LC: How to Choose (2026)

The short answer

Almost every export an Indian exporter sells runs on one of three payment terms: advance payment, letter of credit, or open account. They differ in exactly one respect — who carries the risk of not getting paid. Advance payment makes the buyer carry it. A letter of credit hands it to a bank. Open account leaves it with you.

Cost, speed, paperwork and cash flow are all downstream of that single choice. So the question is not which term is cheapest or best. It is: for this buyer, in this country, on this order value — whose risk am I willing to hold, and can I afford to hold it?

The three instruments, and who each one protects

• Advance payment: the buyer pays before you ship, in full or as part payment. You carry no credit risk at all. The catch is commercial — buyers dislike it, and in a competitive market insisting on it can cost you the order.
• Letter of credit (LC): the buyer's bank commits in writing to pay you when you present documents that match the LC. Your risk becomes document risk rather than buyer risk. The payment is promised by a bank, and the bank pays on documents, not on the goods being what you said they were.
• Open account: you ship, invoice, and wait out an agreed period — typically 30, 60 or 90 days. No bank is involved anywhere in the chain. Cheapest to run, fastest to close, and the only one of the three where a buyer's insolvency becomes your problem directly.

The route many exporters skip sits between the last two: a documentary collection, DA or DP. Your bank presents shipping documents to the buyer's bank, which releases them against payment or against acceptance of a time draft. It is meaningfully cheaper than an LC and gives the buyer some protection, but no bank guarantees the payment — so if the buyer defaults, your recourse is the same as open account plus collection charges.

The decision matrix

Two rules of thumb cover most decisions. If losing the order would hurt you more than losing the shipment, take the advance. If the exposure would hurt you more than a slice of margin, take the LC. Open account is not a third-best compromise — it is the only one where you finance the buyer yourself, and it only belongs on the table once you have priced that.

The term ladder: how to graduate a buyer

Payment terms are not a menu to pick from once. They are a ladder, and a new buyer should start near the bottom. Each rung trades a little more risk for a little more commercial appeal — which is exactly why the move upward should be earned by payment behaviour rather than granted on a good first meeting.

Two mechanics matter on the middle rungs. Under D/P the buyer cannot take delivery without paying, so your exposure is delay, storage and return freight rather than the invoice itself. Under D/A the buyer takes the goods against a signed promise, which is not a bank obligation — so D/A is the first rung where a default is genuinely your loss. Treat it accordingly: a D/A buyer needs a credit limit, not just a signature.

• Three clean cycles per rung — no invoice more than 15 days late, no disputed documents, no short payment.
• Move one variable at a time — either the tenor lengthens by 30 days, or the limit rises 25–50%. Rarely both.
• Insurance before open account — get the buyer limit approved before the first unsecured shipment, not after.
• A written step-down rule — two late payments in twelve months puts the buyer back one rung automatically.
• Re-check the entity at each rung — the buyer who reaches open account should be the same legal entity that started on advance.

What each term actually costs

Three cost layers sit under every export payment, whichever term you pick. The first is the FX conversion spread — the gap between the mid-market rate and the rate your bank gives you. On most orders this single layer outweighs every bank charge combined, so comparing rates across banks matters more than negotiating fees.

The second is bank charges. An advance transfer is one instruction and a flat fee. An LC is structurally the most expensive instrument on the page, because up to four banks can take a fee across issuance, advising, confirmation and negotiation. Documentary collection costs sit between the two.

The third is the cost of money, and it is the one open account hides. Open account looks free because no bank charges you a fee. What you are actually doing is lending the buyer your working capital for 30, 90 or 180 days at zero interest. Price that at your own cost of funds and open account stops being the cheapest option — it becomes the one you must actively choose.

When to offer open account, and when to refuse

Open account is the term buyers expect, because credit is normal in their markets and asking for it costs them nothing to ask. Exporters who refuse to extend any credit lose sales to competitors who do. The workable position is not a blanket yes or no — it is a set of conditions.

• Say yes when the buyer has paid you on time before, and the payment history is long enough to be more than one lucky order.
• Say yes when you have checked the buyer — credit standing, trade references, and how they pay their other suppliers.
• Say yes when the country is one you are willing to hold receivable risk in, and you know which risks apply there.
• Say yes when the open-account tenor plus your production cycle is something you could fund twice over from your own working capital, without a facility.
• Say yes when cover is in place first — the buyer limit approved, the policy declared, before the proforma invoice goes out.
• Refuse, or step back to an LC, when the buyer is new, when the order is large relative to your turnover, when the tenor is long, or when the country carries transfer or political risk.

Most exporter-buyer relationships move up a ladder. The first order is on advance or LC. As payment history builds, you move the buyer to open account to protect the commercial relationship and win the next one. Treat each step as earned rather than granted, and step back down the ladder the moment a payment slips — a late payment is the cheapest possible warning that a limit is wrong.

When to insure an open-account sale

Insuring the receivable is what turns open account from a gamble into a priced decision. It covers the loss when the buyer defaults or becomes insolvent, and the separate loss when a country blocks your money from coming home. It also does something less obvious: an approved buyer limit becomes a credit decision you can defend, instead of a judgement call made on a Friday afternoon.

Two practical details catch people out. First, cover has to be in force before you ship — a policy bought after the goods have gone does not attach to that shipment. Second, claiming is not automatic: policies require you to notify bills that stay unpaid beyond a set period and to file the claim within a fixed window from the due date of the export bill, so your follow-up discipline matters as much as your cover.

The 2026 rule that changed the arithmetic

India's export realisation rules tightened again, and they tighten the case against long open-account tenors specifically. Under the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, in force from 1 October 2026, the full export value must be realised and repatriated within nine months from the date of shipment for goods, and within twelve months where the export is invoiced or settled in rupees. Your authorised dealer may grant an extension if you cite reasons and they are satisfied.

The consequence sits in the next regulation. If export proceeds remain unrealised for more than one year beyond the due date — or beyond any extended period your bank allowed — you may undertake further exports only against receipt of full advance or an irrevocable letter of credit.

Read that as what it is: a hard stop. An open-account buyer who pays at day 100 is a commercial annoyance. An open-account buyer who does not pay has always been a loss. Under the current rules, that buyer can also push your entire book of future shipments onto advance or irrevocable LC terms — which is a working-capital event, not just a bad-debt event.

The practical response is not to abandon open account. It is to stop offering long tenors to buyers you have not checked, keep a hard internal limit on days outstanding, and treat any bill that goes past due as a signal to re-insure, re-limit or step back to a confirmed LC.

Set your terms for the next order

1. Check the buyer before the deal — pull credit standing, trade references and country risk for this specific buyer, while you still have the option to walk away.
2. Price all three routes on the same order — ask your bank for the all-in cost of an advance transfer, an LC and a documentary collection, then add the cost of funding an open-account wait.
3. Set a tenor you could survive twice over — choose open-account days against your own working capital, not against what you hope to collect next month.
4. Put cover in place first — if the answer is open account, get the policy and the buyer limit approved before the proforma invoice leaves.
5. Write the term into the proforma invoice — state the payment method, the documents required and the exact due date, because an unstated term becomes an argument after the shipment.
6. Track the regulatory clock from shipment — diarise nine months from the shipping bill, and the one-year cliff from the due date of the bill.
7. Re-negotiate on evidence, not on feeling — move a buyer up the ladder after clean payment history, and step them back down the moment a payment slips.

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