Letter of Credit vs. Open Account: Which Export Payment Term Should You Offer in 2026?

A letter of credit (LC) puts a bank's commitment behind your payment, provided your documents comply. Open account means you ship first and get paid later, typically in 30, 60 or 90 days: the most attractive option for the buyer and one of the riskiest for you. Between the two sit documentary collections; at the extremes, cash-in-advance and consignment. Many small exporters end up offering open account with risk mitigation such as export credit insurance, which EXIM says covers up to 95 percent of sales invoices. This comparison draws on Trade.gov's Methods of Payment page, the Trade Finance Guide (2022 edition) and EXIM's program pages.

The five methods on one risk spectrum

Trade.gov sums up the tension: for exporters, any sale is a gift until payment is received; for importers, any payment is a donation until the goods arrive. Each method shifts that risk differently.

Letters of credit: secure, but document-driven

Trade.gov calls LCs one of the most secure instruments available to international traders. An LC is a commitment by a bank, on behalf of the buyer, that payment will be made to the exporter provided the terms and conditions of the LC have been met, as verified by presentation of all required documents. Key points from the Trade Finance Guide:

• Banks deal in documents, not goods. The LC is a separate contract from the sale; the bank's obligation depends solely on your documents complying.
• Discrepancies can cost you payment, which is why the guide recommends documents prepared by trained professionals or outsourced.
• Irrevocable by default: unless stated otherwise, an LC cannot be changed or cancelled without the agreement of importer, banks and exporter.
• Confirmation adds a second bank's promise. With a confirmed LC, a bank (typically in your country) pays you on compliant documents before it is reimbursed by the issuing bank. Without confirmation, you carry the foreign bank's payment risk and the importing country's political risk.
• Cons: labor-intensive and relatively expensive in transaction costs; the buyer pays its bank for the service.

The guide suggests a confirmed LC when you doubt the foreign bank's credit standing, operate in a high-risk market (political upheaval, devaluation, exchange controls), or the buyer asks for extended payment terms.

Documentary collection vs. letter of credit

In a documentary collection (D/C), your bank sends the shipping documents to the buyer's bank with instructions to release them against payment (D/P) or against the buyer's signed acceptance of a draft (D/A). D/Cs are generally less expensive than LCs, but banks offer no verification process and limited recourse: they control the flow of documents without guaranteeing payment.

• D/P: you keep control of the goods until the buyer pays at sight. If the draft goes unpaid, you may need to arrange for the goods to be returned, sold to someone else or disposed of.
• D/A: the buyer gets the documents, and therefore the goods, by accepting a time draft. You lose control of the goods and payment at maturity isn't assured.
• Air and overland shipments: the guide warns that the buyer can obtain the goods without the documents, so D/Cs suit ocean shipments where documents control delivery.

Open account: competitive, if you manage the risk

Buyers often press for open account terms because extending credit is more common abroad, and exporters who refuse may lose sales to competitors. The Trade Finance Guide lists four techniques that let you offer open account while substantially reducing non-payment risk:

1. Export credit insurance (ECI): covers commercial risks (insolvency, bankruptcy, protracted default) and certain political risks (war, currency inconvertibility, expropriation).
2. Export working capital financing: funds materials, labor and inventory while you wait to be paid.
3. Export factoring: you sell short-term receivables at a discount to a factor, which assumes the buyer's payment liability.
4. Standby letters of credit: the buyer's bank guarantees payment if the buyer fails to pay as agreed.

Where EXIM fits in

EXIM, the official U.S. export credit agency, supports exports through three primary programs: Working Capital Loan Guarantees, Export Credit Insurance and Foreign Buyer Financing. Two of them directly support open account selling:

• Working Capital Loan Guarantee: EXIM gives the lender a 90% loan-backing guarantee, so small exporters can borrow more against the same collateral. There is no minimum or maximum transaction amount, the minimum U.S. content requirement is 10%, and the guarantee can back revolving or transaction-specific facilities. Uses include materials, labor, finished goods for export and standby LCs serving as bid or performance bonds.
• Export Credit Insurance: after agreeing credit terms, you ship, invoice, report the shipment to EXIM and pay the premium; if the buyer fails to pay, EXIM pays. Insured receivables are more likely to be included in your borrowing base.

Two caveats from the Trade Finance Guide. A government guarantee protects the lender, not your business, so it does not replace a risk mitigant; a lender may even require ECI as a condition of a working capital facility. And to qualify for SBA- or EXIM-guaranteed working capital, exporters generally need to have been in business profitably for at least 12 months (not necessarily exporting), show a need for financing, and document a viable transaction.

A worked decision: the buyer wants 60 days

Suppose a first-time buyer in a new market asks for payment 60 days after shipment. Based on the base's sources, the reasoning runs like this:

1. Is the market or buyer high-risk, or the buyer's credit unverifiable? The guide recommends cash-in-advance or an LC (confirmed if you doubt the foreign bank).
2. Is there competitive pressure to offer terms? Consider open account with ECI. The guide suggests exploring ECI before pricing negotiations so the premium can be built into the price.
3. Will 60 days of receivables strain cash flow? Look at a working capital facility; EXIM's guarantee backs 90% of the lender's loan.
4. Is the relationship established and shipment by ocean? A documentary collection may be a cheaper middle ground.
5. Is the buyer a distributor holding stock? Consignment is possible, but the guide calls it very risky and notes ECI covers consignment usually only through a special rider, where available.

To compare options for a specific buyer, ask the US export basics knowledge base, for example “My buyer wants to pay 60 days after shipment: what's that called, and how risky is it?” or “What insurance exists if my overseas customer doesn't pay?”

This comparison is general information, not financial advice; premiums, rates and eligibility are set case by case by lenders and insurers. See Trade.gov's Methods of Payment and EXIM's Working Capital page for current details.