How Do You Choose Between Advance Payment and Credit Terms for Export Orders?

Export payment terms are the contract clauses that fix when, how and against what the foreign buyer pays. They decide who carries the risk of non-payment and who funds the gap between shipping and getting paid. The four common methods are advance payment, letter of credit, documentary collection and open account.

• Advance: The buyer pays all or part of the value before you ship goods or start the work. You carry almost no payment risk, and the buyer carries the delivery risk. Under FEMA, the advance and any later proceeds must go through the same AD bank, unless you tell both banks of a change (Regulation 10(1)).
• Letter of credit: The buyer's bank undertakes to pay you if you present documents that match the credit's terms. ICC's UCP 600 rules are the common standard for documentary credits (ICC trade finance rules).
• Collection: Your bank sends the shipping documents to the buyer's bank, which releases them against payment (D/P) or against acceptance of a bill of exchange payable later (D/A). ICC's URC 522 rules cover the collections process (ICC trade finance rules).
• Open account: You ship or deliver first and the buyer pays on the agreed due date, for example 30 or 60 days after invoice. You carry the full risk of late payment or default.
• Consignment: Goods sent to a warehouse outside India are paid for only when sold, and FEMA counts the realisation period from the date of sale (Regulation 5(1)(b)).

Most exporters mix these methods. A new buyer may start on advance or a letter of credit, and a buyer with a good payment record may later move to collection or open account terms. For the RBI rules on upfront money, see advance payment against exports.

Every Indian exporter of goods, software or services needs to choose export payment terms, because the contract or invoice must say when payment is due. RBI's 2026 regulations treat software as a service and apply the same realisation rules to goods and services, so freelancers face the same FEMA limits as manufacturers.

Choose export payment terms by weighing how much you trust the buyer, the order size, the buyer's country and how long you can wait for money. Then check that the due date fits inside FEMA's nine-month realisation period and write the terms clearly in the contract or proforma invoice.

1. Assess the buyer: payment history with you, trade references and any credit report. New or unknown buyers usually justify advance payment or a letter of credit.
2. Check the buyer's country risk. Export credit insurers grade countries, and ECGC lists some as restricted cover countries where specific approval is needed (ECGC FAQ).
3. Work out your cash needs. On credit terms you fund production or work until the buyer pays, so check whether you need pre-shipment or post-shipment credit or export factoring.
4. Pick the method and the split, for example a 30% advance with the balance against documents, or monthly invoices payable in 30 days.
5. Confirm the due date falls within nine months of shipment or invoice, or twelve months for rupee invoicing (Regulation 5(1)). See export realisation period.
6. Write the terms into the contract or proforma invoice: amount, currency, method, due date, late payment interest if any, and the Incoterm for goods (what is Incoterms).
7. Tell your AD bank about any advance, and route the advance and balance through the same AD bank (Regulation 10(1)).
8. Track each invoice until the AD bank closes the EDPMS entry (Regulation 18(1)(g)).

Advance payment gives the exporter the most security and open account gives the least. Letters of credit and collections sit between the two and add bank charges and document work. The table compares the main export payment terms on when payment arrives, who carries the risk and what it costs.

If a buyer on credit terms does not pay within the FEMA realisation period, the export stays open in EDPMS and your AD bank must follow up with you. You can ask for an extension or a reduction in value. Proceeds unrealised for more than a year past the due date restrict future exports to advance or letter of credit terms.

• Bank follow-up: Your AD bank must have systems to monitor and follow up on export proceeds within the realisation period (Regulation 5(2)) and must follow up on outstanding EDPMS entries (Regulation 18(1)(f)).
• Extension: The AD bank may extend the realisation period on your request if satisfied with the reasons (Regulation 5(1), second proviso).
• Reduced value: The AD bank may allow a reduction or non-realisation of export value on reasons given; up to ₹10 lakh per shipping bill or invoice, your declaration can be enough (Regulation 6).
• Advance only: Proceeds unrealised for more than one year beyond the due date or extended date mean further exports only against full advance or an irrevocable letter of credit (Regulation 13). Exporters already on the caution list on 30 September 2026 stay under RBI's order until removed.
• GST on LUT: If you exported services under a Letter of Undertaking and payment is not received within one year or the FEMA period with any extension, whichever is later, IGST with interest becomes payable fifteen days after that period, unless the Commissioner allows more time (CGST Rule 96A(1)(b)).
• Penalty: A FEMA contravention can attract a penalty of up to three times the sum involved where quantifiable, or up to ₹2 lakh where not, plus up to ₹5,000 a day if it continues (Master Circular on Compounding, para 1.1).

Before the realisation period ends, write to your AD bank with the reasons and evidence of follow-up with the buyer, and ask for an extension. If part of the money will never come, ask for a reduction in value under Regulation 6. If you hold credit insurance, report the overdue bill within the policy's deadline. See export payment not received within the deadline.

The timeline for export payment terms runs from the EDF at shipment or invoice to realisation within nine months and closure in EDPMS. For example, a services invoice dated 10 January must have its EDF filed by 2 March (30 days from the end of January) and be paid by 10 October. Those dates are illustrative.

• Long credit: Agreeing a due date beyond nine months from shipment or invoice without planning for an AD bank extension under Regulation 5(1).
• Vague terms: Writing "payment on completion" with no due date, currency or method, which makes follow-up and any insurance claim harder.
• Split banks: Taking the advance in one AD bank and the balance in another without informing both banks, which breaks Regulation 10(1).
• Document errors: Presenting documents under a letter of credit that do not match its terms, which lets the bank refuse payment. Check every document against the credit before presenting it.
• No cover: Shipping on D/A or open account to a new buyer without a credit check or insurance. Under ECGC's Standard Policy, commercial risk is covered only if a credit limit is approved on the buyer (ECGC FAQ).
• Ignoring GST: Forgetting that unpaid service exports under an LUT can trigger IGST with interest after the period in CGST Rule 96A(1)(b). See what is LUT.

Every rule, deadline and form on this page is linked to its official source, checked on the dates below.

1. Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, Notification FEMA 23(R)/2026-RB dated 13 January 2026, amended up to 22 September 2026, Regulations 2(1) Explanation, 3(1), 3(2), 4(2), 5(1), 5(2), 6, 10(1), 13, 18(1)(f), 18(1)(g), 19(1)(b), footnotes 2 to 5 (checked 9 Oct 2026)
2. RBI A.P. (DIR Series) Circular No. 20, RBI/2025-26/194: Export and Import of Goods and Services, 16 January 2026, Para 4 (Master Directions and listed circulars superseded) and para 7 (effective 1 October 2026) (checked 9 Oct 2026)
3. International Chamber of Commerce: Trade finance rules and guidelines (UCP 600, URC 522, eUCP, eURC), Descriptions of URC 522 Uniform Rules for Collections and UCP 600 / eUCP for documentary credits (checked 9 Oct 2026)
4. ECGC Ltd: Shipments Comprehensive Risks Policy (SCR), Standard Policy, Risks covered including L/C opening bank risk; monthly declaration of bills unpaid beyond 30 days by the 15th of the next month (checked 9 Oct 2026)
5. ECGC Ltd: Small Exporters Policy (SEP), Turnover up to Rs 5 crore; overdue declarations at 60 days; D/P to D/A conversion and D/A extension without prior approval (checked 9 Oct 2026)
6. ECGC Ltd: Frequently Asked Questions (short-term policies), Standard Policy covers DP, DA and OD terms; credit limits; L/C shipments and political risk; discrepancy cover up to 25% of GIV; restricted cover countries; prior approval for DP to DA conversion (checked 9 Oct 2026)
7. Central Goods and Services Tax Rules, 2017: Rule 96A (Export under bond or Letter of Undertaking), Sub-rule (1)(b), as substituted by Notification No. 12/2024-CT (checked 9 Oct 2026)
8. RBI Master Circular on Compounding of Contraventions under FEMA, 1999, Para 1.1, restating FEMA section 13(1) penalties (checked 9 Oct 2026)