DA vs DP vs explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Export payment terms run from advance payment (safest for the exporter) through confirmed letter of credit, unconfirmed LC, documents against payment, documents against acceptance, to open account (riskiest). The right term depends on the buyer's standing, the country risk, the financing you need and what the market will accept.
The Risk Ladder
| Term | Exporter risk | Buyer appeal | Financing quality |
|---|---|---|---|
| Advance payment | Lowest | Lowest | No financing needed |
| Confirmed irrevocable LC | Very low | Low — ties up the buyer's credit line and costs them fees | Best — finest negotiation rates |
| Unconfirmed irrevocable LC | Low, but carries issuing bank and country risk | Moderate | Good |
| Documents against payment (D/P) | Moderate — goods stranded if the buyer refuses | Moderate | Fair — bills purchased at wider spreads |
| Documents against acceptance (D/A) | High — goods released before payment | Good | Weaker |
| Open account | Highest | Highest | Poorest — no document control |
Advance Payment
Full or partial payment before shipment. Full advance is rare outside first orders, small values and scarce products. A partial advance — commonly 30% with the balance against documents — is a practical middle ground that covers your material cost and demonstrates the buyer's commitment.
Letter of Credit
The issuing bank undertakes to pay against a complying presentation of documents. The critical points an exporter must internalise:
- The undertaking is documentary. Banks pay against documents, not goods. Perfect goods with discrepant documents do not get paid on the bank's obligation.
- Confirmation is what removes country risk. An unconfirmed LC from a bank in a country with exchange restrictions is only as reliable as that country's ability to remit. Confirmation by a bank in India, or another acceptable jurisdiction, converts it into a domestic-quality obligation.
- Read the credit on arrival. Unworkable conditions must be amended before goods move, not discovered at presentation.
- Beware buyer-controlled conditions. A required inspection certificate signed by the applicant hands the buyer a switch over your payment.
Cost sits with the buyer for issuance and usually with the exporter for confirmation and negotiation, though this is negotiable and should be stated in the contract.
Documents against Payment (D/P)
Your bank sends documents to the buyer's bank with instructions to release only against payment. No bank promises to pay — the banks act as agents handling documents under the collections rules.
What protects you: the buyer cannot get the goods without paying, provided the transport document is one that requires surrender of an original.
What exposes you: if the buyer simply refuses, your goods are at a foreign port accruing demurrage, and your realistic options are to find another buyer locally at a discount or ship them back at cost. That is why D/P suits readily resaleable goods and not custom-made ones.
Documents against Acceptance (D/A)
Documents are released against the buyer's acceptance of a bill of exchange payable at a future date. The moment the documents go, the buyer has the goods and you have a piece of paper.
Treat D/A as a credit decision, not a payment term. Apply the same discipline you would to lending:
- Credit report and trading history on the buyer
- ECGC country category checked and buyer limit approved
- Exposure capped per buyer
- Tenor kept as short as the market allows
- Interest on the usance period built into the price
Open Account
Goods and documents are sent directly to the buyer, who pays on the agreed date. It is the norm in several sectors and in intra-group trade, and refusing it outright can cost you the business.
Make it survivable rather than refusing it: hold an ECGC policy with an approved limit for that buyer, cap the exposure, invoice promptly and chase early, and revisit the limit whenever payment behaviour changes.
Matching the Term to the Situation
| Situation | Sensible term |
|---|---|
| First order, unknown buyer, weaker market | Advance payment, or confirmed irrevocable LC |
| Known buyer, weaker market | Confirmed LC, or D/P with ECGC cover |
| Known buyer, strong market | Unconfirmed LC or D/P |
| Long-standing buyer, strong market | D/A or open account with ECGC cover |
| Custom-made or unsaleable-elsewhere goods | Substantial advance plus LC; never D/A |
| Commodity, readily resaleable | D/P is workable |
| Buyer with an established group parent | Consider a parent guarantee alongside open account |
Pricing the Term
Payment terms are a cost, and they belong in the price. A 90-day D/A sale ties up working capital for 90 days, carries a financing cost at your export credit rate, carries an ECGC premium, and carries residual default risk. Quote a discount for advance payment and a premium for extended credit, explicitly. Buyers respond to a stated differential far better than to a refusal.
Practical Tips
- Set an internal policy — maximum exposure per buyer, per country, and per payment term — and apply it consistently instead of deciding order by order.
- Check the ECGC country classification before agreeing terms, not before shipping.
- Under a collection, nominate a case-of-need in the buyer's country and define their authority precisely.
- Never send documents directly to a buyer under a collection; that defeats the entire mechanism.
- Under an LC, present early enough to correct and re-present within the 21-day and expiry limits.
- Review terms annually per buyer. Relationships improve and deteriorate, and terms should follow.