Payment terms and trade finance for green coffee.

Every cross-border sale contains a gap in trust. The seller ships before being paid, or the buyer pays before receiving the goods; someone is exposed first. Payment terms are the mechanism for allocating that exposure, and trade finance instruments are the tools for narrowing it.

For green coffee the exposure is real on both sides. The buyer is committing significant sums against a commodity they cannot inspect until it arrives, the washed and natural lots on our coffee page, grown in Amaro, are cupped from samples, not from the container. The seller is shipping a perishable agricultural product across an international border, after which recovering unpaid goods is impractical.

The terms below run from most seller-protective to most buyer-protective. New trading relationships typically start nearer the seller-protective end and move along the spectrum as a track record is built. None of it is set by the Incoterms rule, a point this guide returns to at the end.

The instrument chosen has a cost, and it is not only the bank charge. Advance payment ties up the buyer's working capital. A letter of credit consumes the buyer's credit line and takes days to arrange. Open account exposes the seller's cash flow. Each side is trading risk against cost, and a term that suits one party's balance sheet may not suit the other's.

A documentary letter of credit is an undertaking by the buyer's bank to pay the seller on presentation of a stated set of documents that comply exactly with the credit's terms. It replaces the buyer's credit risk with the bank's, which is why it is used when the parties do not yet have the history to trade on collection or open account.

The mechanism is documentary, and the word matters: the bank pays against documents, not against the coffee. If the presented documents match the credit, the bank pays even if the coffee is later found wanting; if they do not match (a date out of range, a description that differs by a word) the bank may refuse to pay for coffee that is entirely sound. Documentary discrepancies are the main practical failure mode.

• The credit lists the exact documents required, commonly the commercial invoice, the transport document, and the origin and regulatory certificates set out in the documentation checklist.
• The transport document is the pivot. A negotiable bill of lading controls the right to take delivery, so whoever holds it controls the goods; the bank holds it until it is paid.
• The credit should be irrevocable, and a seller uncertain of the issuing bank may ask for it to be confirmed by a bank in the seller's own country, which adds a second guarantee and a second fee.
• Every date, quantity tolerance and goods description in the credit must match the sales contract, or the seller is obliged to ship against one set of terms and be paid against another.

In a documentary collection the banks pass documents but do not guarantee payment. The seller ships, then sends the documents through the banking chain with instructions for their release. It is cheaper than a letter of credit and gives the seller more security than open account, without a bank standing behind the buyer.

Documents against payment (D/P)

Also called cash against documents. The buyer's bank releases the documents (including the transport document that controls the goods) only when the buyer pays. The seller keeps control of the cargo until payment, but carries the risk that the buyer simply does not present to pay, leaving a container at a distant port.

Documents against acceptance (D/A)

The buyer receives the documents against accepting a bill of exchange (a formal promise to pay on a future date) and can then collect and sell the coffee before paying for it. The seller has extended unsecured credit, and D/A is used only where that credit risk is acceptable.

The two ends of the spectrum are the simplest to operate and the least balanced. Under full advance payment the buyer funds the entire transaction and relies on the seller to perform; under open account the seller ships and invoices and relies on the buyer to pay on time. Each removes all bank involvement and all bank cost, and places the whole risk on one party.

A common middle position is a deposit on order with the balance payable against shipping documents. This splits the exposure: the seller has committed funds from the buyer before allocating a lot, and the buyer pays the balance only once documents evidence that the coffee has shipped. It is frequently how a relationship operates before it graduates to a collection or open-account basis.

This is the most common confusion in a first contract. An Incoterms rule allocates carriage, cost and risk for the physical movement of the goods. It says nothing about when or how the goods are paid for. "CIF Hamburg" tells you the seller arranges and pays freight to Hamburg and insures to a minimum standard; it does not tell you whether payment is by letter of credit, collection or open account.

The two interact only through the documents. A letter of credit calls for a transport document, and the Incoterms rule determines which document the seller can provide and at what point, which is why the FCA on-board bill of lading option introduced in Incoterms 2020, described in the Incoterms guide, matters for letter-of-credit trades. Beyond that, the two are set independently, in different clauses of the same contract.