Payment terms are the most negotiated part of an export contract after price, and in tobacco the choice shapes cost, timing and risk because lots are large, documents are numerous and the parties sit in different jurisdictions. This article compares the two common routes in general terms and does not describe any party's own payment terms.
How each works
Telegraphic transfer (TT). The buyer instructs its bank to send money to the seller's bank account. Timing is set by the contract: before shipment (advance), at shipment, against copy documents, or after delivery (open account). The bank moves money; it does not check goods or documents.
Letter of credit. The buyer asks its bank (the issuing bank) to open a credit in the seller's favour. The bank undertakes to pay, or to accept or negotiate a draft, if the seller presents documents that comply with the credit's terms. The advising bank, usually in the seller's country, authenticates the credit and tells the seller. The seller ships, collects the documents (bill of lading, invoice, packing list and others), and presents them within the credit's time limits. The bank examines them on their face and pays or refuses.
Documents drive the LC. Banks deal with documents, not with goods, so a perfect shipment with a non-compliant document can still fail.
Risk map
| Item | Buyer risk | Seller risk |
|---|---|---|
| TT in advance | Pays before shipment; may receive wrong quality or nothing | Low |
| TT on delivery / open account | Low | Buyer may pay late or not at all; relies on trust and credit checks |
| Unconfirmed LC | Cost of opening; margin or collateral held by bank | Issuing bank and country risk; document compliance |
| Confirmed LC | As above, plus confirmation costs usually passed to buyer | Reduced bank and country risk; document compliance remains |
The ICC Trade Register, which pools loss data from member banks, has repeatedly reported low default rates on trade finance products including letters of credit. That record is one reason they remain common in cross-border commodity trade.
LC types in brief
- Sight LC: payment on presentation of compliant documents.
- Usance (deferred) LC: payment at a set later date, such as a number of days after shipment or presentation.
- Confirmed and unconfirmed: whether a second bank adds its own undertaking.
- Standby LC: a bank guarantee-like instrument that pays if the buyer fails to pay under another arrangement; often used to back open-account terms.
UCP 600 basics
The ICC's Uniform Customs and Practice for Documentary Credits, UCP 600, governs most commercial letters of credit. It applies where the credit says it is subject to UCP 600.
- A credit is irrevocable by default. It can be amended or cancelled only with the agreement of the beneficiary and any confirming bank.
- Banks examine documents on their face. Data need not be identical, but must not conflict with the credit or with other documents.
- Banks have a maximum of five banking days following the day of presentation to decide.
- A refusal must list all discrepancies in one notice. A bank that does not refuse in time loses the right to claim discrepancy.
These points are general. The credit text and any additional conditions control, so read them carefully before accepting.
Documents and discrepancy traps
A tobacco credit commonly asks for:
- Commercial invoice
- Packing list
- Full set of bills of lading
- Phytosanitary certificate
- Certificate of origin
- Quality or inspection certificate, or certificate of analysis
- Insurance certificate, where the Incoterm requires it
- Weight certificate or survey report
The common traps are small:
- Name and address mismatches between credit, invoice and bill of lading.
- Product description on the invoice not matching the credit's wording.
- Late shipment or late presentation against the dates in the credit.
- Weights and quantities differing across documents.
- HS code or wording inconsistent between certificates. Our export compliance page covers classification and documentation basics.
- Missing original certificates when originals are required.
- Wrong port names, or transshipment where the credit prohibits it.
- Certificate issued by someone the credit did not name.
Buyers can reduce waste by drafting the credit to match what the seller can actually supply, and sellers by reviewing the credit on receipt and asking for amendments before shipping. Our process and logistics page shows the same discipline on the shipping side.
Hybrid structures
Real deals often mix terms:
- Advance plus balance. A percentage by TT on order and the balance by LC or TT against documents.
- LC with a deferred period. Gives the buyer time to sell goods, with the bank's undertaking behind the seller.
- Open account backed by a standby LC. The standby pays only if the buyer defaults.
- Documents against payment or acceptance via banks (collections). Banks forward documents but do not undertake to pay.
Open account carries the most unsecured risk for a seller. Credit insurance or export credit agency cover may be available in some countries, for example through a national export credit body. Cover, eligibility and terms vary by insurer and country, so check them directly.
Cost and timing
| Item | TT | LC |
|---|---|---|
| Bank charges | Low | Higher: issuance, advising, negotiation, confirmation, amendment |
| Set-up time | Immediate | Days to weeks to issue, advise and check |
| Working capital | Depends on terms | Buyer may need to fund margin or collateral |
| Paperwork | Light | Heavy, exact |
| Dispute handling | Contract and courts | Documents decide payment; contract disputes remain separate |
Bank charges and margins differ by bank and country, so ask for written quotes.
Compliance note
Banks run sanctions and anti-money-laundering checks on both TT and LC transactions. Delays can occur when product, route or parties raise questions. Provide complete, consistent information to your bank early.
Choosing
There is no best option. First orders, new counterparties, high-value or deferred deals and higher-risk countries lean toward LCs, confirmed where needed. Established relationships often move to TT or open account with credit insurance. Agree the structure before price is final, since cost and timing affect the commercial terms.
Frequently asked questions
Do UCP 600 rules apply to every letter of credit?
They apply when the credit's text expressly says it is subject to UCP 600. Under them, a credit is irrevocable by default.
What is a confirmed letter of credit?
It carries a second bank's undertaking, usually in the seller's country, in addition to the issuing bank's. This reduces the seller's exposure to the issuing bank and country risk, at a cost.
Can payment terms be mixed?
Yes. Hybrid structures such as an advance by TT with the balance by LC are common. A standby LC can back an open-account or deferred payment. Each part should be documented clearly.
