Advance payment or L/C for a first order from an Indian exporter

This guide explains how advance payment and letters of credit work for a first order from an Indian food exporter, what each costs and risks, and how to write an L/C that pays smoothly instead of stalling on discrepancies.

The basic trade-off

• Advance payment (telegraphic transfer): the buyer pays before shipment. The exporter carries no credit risk. The buyer relies on the exporter to ship the right goods on time.
• Letter of credit (L/C): the buyer's bank promises to pay the exporter when the exporter presents documents that comply with the credit. Each side relies on a bank rather than on the other party.

Many exporters, including DELxPort, work on 100% advance or an irrevocable L/C for new buyers.

Advance payment by TT

How it works

1. The exporter sends a pro forma invoice with product, specification, quantity, Incoterm, price, shipment period and bank details.
2. The buyer remits the amount by SWIFT transfer to the exporter's bank account in India.
3. The Indian bank credits the exporter and records the inward remittance as an export advance.
4. The exporter produces, packs and ships, then sends copies of the shipping documents and releases the originals or a telex/express release to the buyer.

Costs

The remitting bank's fee, any intermediary bank charges and the exchange margin. It is the cheapest and fastest method.

Risks for the buyer and how to reduce them

• Non-delivery or wrong quality. Agree a written specification and ask for a pre-shipment sample. You can appoint an independent inspection agency to check quality, weight and loading.
• Payment fraud. Fraudsters intercept email and send "updated" bank details. Pay only to an account in the exporter's registered company name, and confirm any change of bank details by phone using a number you already hold.
• Who you are dealing with. Indian exporters must hold an Importer Exporter Code (IEC) issued by the DGFT. Ask for it and check it on the DGFT website. Food exporters are also commonly registered with APEDA.

Letter of credit

How it works

1. Buyer and exporter agree the sale contract, including that payment will be by L/C.
2. The buyer applies to its bank (the issuing bank) to open the credit.
3. The issuing bank sends the L/C by SWIFT to a bank in India (the advising bank), which checks it is authentic and passes it to the exporter.
4. The exporter checks every term. If something cannot be met, the exporter asks for an amendment before shipping.
5. The exporter ships and presents the required documents to its bank.
6. The banks examine the documents. If they comply, the issuing bank pays (or accepts to pay later). The buyer then pays its bank and receives the documents needed to collect the goods.

Banks deal only in documents. If the documents comply, the bank pays, even if the cargo turns out to be disappointing. This is why the quality clauses and inspection certificate requirements in the L/C matter.

What "irrevocable" means

An irrevocable credit cannot be amended or cancelled without the agreement of the issuing bank, the beneficiary (the exporter) and any confirming bank. Under the ICC's UCP 600 rules, which govern almost all documentary credits, a credit is irrevocable even if it does not say so.

What "at sight" means

A sight credit pays once compliant documents are presented and checked. Under UCP 600, banks have up to five banking days after presentation to examine documents.

A usance (or deferred payment) credit pays at a set time later, for example 90 days after the bill of lading date. It gives the buyer credit time. Exporters usually price this in.

Confirmation

A confirmed L/C adds the promise of a second bank, usually in the exporter's country, to pay if documents comply. Exporters ask for confirmation when they are uncertain about the issuing bank or its country. The confirmation fee is normally the exporter's cost unless agreed otherwise.

Costs

The credit should state which charges are for whose account. Your bank may also need cash margin or a credit line before issuing.

Documents usually called for in a food L/C

• Commercial invoice
• Packing list
• Full set of clean on-board bills of lading
• Certificate of origin
• Phytosanitary certificate
• Fumigation certificate for sea cargo, where required
• Inspection or analysis certificate, if you want quality checked before payment
• Insurance certificate under CIF or CIP

Ask only for documents the exporter can actually obtain, issued by bodies that actually issue them. A certificate from a body that does not exist, or a document only the buyer can provide, makes the credit unworkable.

Common discrepancies

A discrepancy is any point where documents do not comply with the credit or with each other. Typical ones on food shipments:

• Late shipment: bill of lading dated after the latest shipment date.
• Late presentation: under UCP 600, documents must be presented within the period stated in the credit or, if none is stated, not later than 21 calendar days after shipment, and always within the expiry date.
• Description mismatch: the goods description on the invoice must correspond with the credit. Other documents may describe goods in general terms but must not conflict.
• Quantity or amount: a credit amount or quantity described as "about" allows a 10% tolerance. Where no such word is used, UCP 600 allows 5% more or less on quantity for bulk goods, but not when quantity is stated in a number of packing units such as bags.
• Unclean bill of lading: clauses noting damaged bags or packaging.
• Insurance: cover below 110% of CIF or CIP value, or dated after shipment.
• Inconsistent data: different weights, marks or container numbers across documents.
• Missing signatures or originals: wrong number of originals, or an unsigned certificate.

When documents are discrepant, the bank will normally ask the buyer whether to waive the discrepancy. The exporter then loses the protection of the bank's promise and payment depends on the buyer.

How buyers can help avoid them

• Send the exporter a draft of the L/C before issuing it.
• Allow realistic shipment and expiry dates, with time for rail transit to the port and vessel rollovers.
• Allow partial shipments and transhipment unless you have a reason to forbid them.
• Keep the goods description short, and put detailed specification in the contract or pro forma invoice referenced in the credit.

Which suits a first order

• Advance payment suits smaller trial orders and buyers who want speed and low bank costs, with a sample and an independent inspection for comfort.
• An irrevocable L/C at sight suits larger orders, or buyers whose own bank or internal rules require documentary protection.

Before you order

• Agree the specification and sample in writing.
• Check the exporter's IEC and registered company name.
• Confirm bank details by phone before paying.
• For an L/C, share a draft first and agree which documents and dates are realistic.
• State who pays which bank charges.

If you are planning a first order of rice, pulses or spices, send us the product, quantity, destination port and your preferred payment term, and we will come back with a written quote and the document list.