Last month at the Canton Fair, a boss in the bathroom fittings business sat down across from me. Before signing a contract, he pulled out his phone and showed me a customer's email. It said: "30% T/T in advance, 70% on B/L copy." He asked if the terms were acceptable. I said yes — but he should have asked me three months earlier, when another customer told him "ship first, 60 days' credit." He did not ask then, and that shipment is still holding 800,000 yuan in unpaid balance to this day. He laughed when I said it, the way people laugh when they do not want to admit the mistake is theirs. The story starts the way most payment disasters do: with a handshake and a promise.
T/T: the most common method, and the one full of traps
T/T (telegraphic transfer) is the most widely used method among small and medium-sized exporters, roughly accounting for more than 60% of collection volume. Its advantages are hard to argue with: low fees, about $20 to $50 per transfer; fast arrival, one to three working days; and flexibility, with no need to assemble a full set of documents. T/T's risks all live in the payment milestones. Ship goods with only a 30% deposit, and when the goods arrive at the port, the customer will not pay the balance — the cargo sits at the dock, with storage fees piling up by the day. Or the customer pays the deposit and then cancels, and the deposit does not cover your production costs. Every experienced trader knows the saying: T/T is not a way to collect full payment; it is a way to collect deposits and control the rhythm of the deal. A 30% deposit plus 70% against the bill of lading copy is the minimum configuration. Anything lower is gambling on the customer's character — and in this business, character has a habit of changing the moment a market turns. On paper T/T looks boring, which is exactly why it stays the default for so many exporters.
A friend of mine in the lighting business negotiated 20% deposit plus 80% paid before shipment with his Polish customer. It cost him a lot of extra conversation, but in three years he has not had a single bad debt. His reasoning is blunt: negotiating payment terms is how you screen your customers. Every buyer who walked away from those terms, he says, was a problem waiting to happen.
Letters of credit: bank backing does not mean zero risk
The essence of a letter of credit is replacing commercial credit with bank credit — the issuing bank promises to pay once the documents conform. It sounds solid, but in practice the traps come one after another: soft clauses, such as "the buyer's nominated person must sign the inspection certificate," which hands payment control to the buyer; discrepancies, where a single spelling error lets the bank refuse payment; and the issuing bank's own reliability — banks in Bangladesh and parts of Africa may issue perfectly real L/Cs and still delay payment. The data makes it plainer: banks' first-presentation discrepancy rate has stayed above 50% for years, meaning over half of all presentations fail on the first attempt. The fees add up too — notification fees, negotiation fees, and discrepancy fees, totaling several hundred to over a thousand dollars per transaction. L/Cs suit large orders, first-time partnerships, and markets with high political risk, such as the Middle East and Africa. They do not suit small, fast-repeating orders, where the paperwork alone can eat the margin. Between the issuing bank, the advising bank, and any confirming bank, there are layers of parties who can hold up your money.
In 2024, a textile mill accepted a sight L/C from a Bangladeshi customer. The documents were fully compliant, yet payment still dragged for 45 days and only arrived after chasing. An L/C guarantees payment when documents conform; it does not guarantee payment on time. The mill's finance manager now treats every L/C as a cash-flow question first and a document question second.
Open account: the most comfortable method, and the biggest hole
Open account means shipping first and collecting later, with credit terms of 30 to 90 days. Large Western customers routinely demand open account, because their procurement process is "inspect the goods, then pay." For the exporter, open account is pure risk exposure: the goods are in the customer's hands, and if the customer goes bankrupt, stalls, or uses "quality problems" as leverage to squeeze prices, you have no leverage left to get the goods back. One number puts it in perspective: among cases insured by Sinosure, China's export credit insurance corporation, buyer default and refusal of goods are the dominant risk types, and in some years the claims payout ratio has exceeded 100%. If you do open account, risk controls are non-negotiable: export credit insurance from Sinosure, with premiums typically 0.3% to 0.8% of the shipment value; customer credit checks, with a Dun & Bradstreet report costing a few hundred yuan; and a per-customer credit cap, kept within one quarter of your own profit. The uncomfortable truth is that open account only works as a privilege for customers who have earned it, never as a default.
Credit insurance is not a silver bullet either: payout ratios typically run 70% to 90%, with a waiting period of two to four months. When a claim actually happens, your cash flow still takes a hit — so plan for that gap before it opens.
A table for choosing the right method
Match your scenario: a first-time small customer — T/T in full, or 30% deposit plus 70% against B/L copy; a first-time large customer with a big order — letter of credit; a long-term customer with three or more years of clean payment history — 30% T/T plus 70% open account, backed by credit insurance; high-political-risk markets like the Middle East, Africa, and South America — sight L/C or 100% T/T, no credit terms at all. Here is one hard rule: if a single order exceeds 10% of your annual profit, never grant credit terms. One bad order of that size can wipe out a year of work, and no payment method in the world fixes that. If you cannot hold this line, everything else is pointless. Keep this list somewhere visible; the moment you start making exceptions, the exceptions become the policy.
This combination is not pulled out of thin air — it is calibrated against years of claims data from export credit insurers. Which customer types and which markets default most often shows up clearly.
What happened to that 800,000 yuan
Back to the bathroom fittings boss. That 800,000 yuan was not a customer who ran out of money. The customer used "quality problems" as a bargaining chip to force the price down, stalled for four months, and finally settled at 70 cents on the dollar — a straight 240,000 yuan loss. He rewrote his collection policy into three rules: new customers always pay 30% deposit plus 70% against B/L copy; any order above $50,000 must go through a letter of credit or credit insurance; and the longest credit term for any customer is 45 days, with automatic suspension of shipments beyond that. None of these rules are new, but after six months of enforcement, his bad debt ratio fell from 8% to below 1%. Collection is not about technique, and it is not about luck. It is about discipline — written down, agreed in advance, and enforced without exceptions.
FAQ
Q1: A new customer insists on shipping before payment. How do I negotiate?
Propose split shipments: start with a small first batch paid in advance, build trust, then scale up. Or ask for bank credit references plus at least two recommendations from the customer's existing suppliers.
Q2: Which L/C soft clauses should I watch out for?
The three most common are: buyer-signed inspection certificates, 1/3 of the original bills of lading sent directly to the buyer, and documents requiring confirmation by the applicant. Ask to delete or amend any of these; otherwise the buyer controls when you get paid.
Q3: A customer is overdue on an open account. How do I chase it?
Send a formal demand letter, ideally from a lawyer, and start the Sinosure loss notification procedure at the same time. If nothing moves within 60 days, go to international arbitration or hire a local collection agency — do not just wait.
Q4: Is export credit insurance expensive?
Premiums typically run 0.3% to 0.8% of the shipment value — $300 to $800 for a $100,000 order. Compared with writing off the full amount in a bad debt, that is cheap.