Letter of Credit vs Open Account: Negotiating Payment Terms With US Exporters in 2026

With a letter of credit, a bank commits to pay the exporter once the documents comply, which suits new relationships but costs the buyer bank fees and paperwork. With open account, the goods are shipped and delivered before payment, usually due in 30, 60 or 90 days: best for the buyer's cash flow, among the riskiest options for the seller. Whether you are a UK importer negotiating with a US supplier or the UK finance team of a US exporter, it helps to know that US exporters can back open account terms with export credit insurance (EXIM: up to 95 percent of sales invoices) and EXIM-guaranteed working capital. Sources: Trade.gov's Methods of Payment, the Trade Finance Guide (2022 edition) and EXIM.

Two sides of the same bargain

Trade.gov frames it neatly: for exporters, any sale is a gift until payment is received; for importers, any payment is a donation until the goods are received. Exporters want paying early, ideally when the order is placed; importers want the goods quickly and to pay as late as possible, ideally after reselling them. Each of the five primary methods splits that tension differently.

Letters of credit: how they protect both parties

An LC is a commitment by the buyer's bank that payment will be made to the exporter provided the terms and conditions of the LC have been met, as shown by the required documents. The Trade Finance Guide calls LCs one of the most versatile and secure instruments in international trade. For the buyer, the protection is that the documents triggering payment evidence that the goods were shipped as agreed.

• Banks deal in documents only. They do not check the goods or the sales contract, so the buyer must write the right document requirements into the LC.
• Discrepancies can block payment to the exporter; the guide recommends professionally prepared documents.
• Irrevocable unless stated otherwise: changes need the agreement of buyer, banks and exporter.
• Confirmed LCs: a US exporter worried about the issuing bank, or the importing country's political risk, may ask for confirmation by a second bank, typically in the exporter's country. Expect this request when you ask for extended payment terms.
• Standby LCs are not a means of payment but can be drawn if the buyer fails to pay; the guide notes they can make open account trading possible with a buyer the exporter does not yet know.

Documentary collections: the middle ground

In a documentary collection, the exporter's bank sends the shipping documents to the buyer's bank, which releases them against payment (D/P) or against the buyer's acceptance of a time draft (D/A). Banks control the documents but neither verify them nor take any risk. The Trade Finance Guide recommends D/Cs only for established relationships, stable markets and ocean shipments where the documents control delivery; with air or road freight, the buyer can generally collect the goods without the documents.

Open account: why US suppliers may say yes

The Trade Finance Guide acknowledges that foreign buyers often press for open account terms, sometimes in their local currency, because extending credit is more common outside the US, and exporters who refuse may lose the sale. It lists four ways US exporters make open account safer:

1. Export credit insurance, covering commercial risks such as insolvency and protracted default, and political risks such as war and currency inconvertibility.
2. Export working capital financing to bridge the 30-90 day gap.
3. Export factoring, selling the receivable at a discount to a factor.
4. Standby letters of credit from the buyer's bank.

For buyers who want to pay in their own currency, sterling for example, the guide describes the exporter using a forward contract: selling a set amount of foreign currency at a pre-agreed rate for future delivery (typically three days to one year), so the US exporter receives a predetermined dollar amount. It does not protect against currency inconvertibility.

What EXIM offers, and to whom

EXIM is the official US export credit agency. Its three primary programmes, in the Trade Finance Guide's words, are Working Capital Loan Guarantees, Export Credit Insurance and Foreign Buyer Financing. All of them support US exports, which explains how a small US supplier can offer terms a UK buyer might not expect:

• Working Capital Loan Guarantee: EXIM guarantees 90% of the lender's loan to the US exporter. No minimum or maximum transaction amount; minimum US content of 10%.
• Export Credit Insurance: the exporter reports the shipment and pays the premium; if the buyer fails to pay, EXIM pays (up to 95 percent of sales invoices).
• Foreign Buyer Financing: EXIM guarantees commercial loans to creditworthy foreign buyers purchasing US goods and services, mostly high-value capital equipment and large projects. The buyer pays the exporter at least 15 percent of the US supply contract in cash; repayment terms run up to five years for capital goods and services, and up to 10 years for transport equipment and large projects (12 to 18 years for certain sectors).

Limits noted in the guide: military items and sales to foreign military entities are generally ineligible, goods must meet EXIM's US content requirements and ship from a US port, and support may be restricted in certain countries. A government guarantee protects the lender, not the exporter.

Consignment: only with a trusted distributor

Consignment is a variation of open account: the foreign distributor receives, manages and sells the goods, the exporter keeps title until sale, and payment comes only for items sold. It suits markets where fast local availability matters, such as heavy machinery floor models, but the guide calls it very risky for the exporter, and credit insurance covers consignment usually only through a special rider, where available. A UK distributor proposing consignment should expect the US supplier to ask for strong references and insurance on the stock.

To test a negotiating position, ask the US export basics knowledge base questions such as “What's the safest way to make sure a foreign bank guarantees payment?” or “Can the US government help a small exporter get a loan when cash is tight?”

General information only, not financial advice; UK banking and financing products are outside the scope of this knowledge base. See Trade.gov's Methods of Payment and EXIM's Export Credit Insurance page for the current details.