Letter of credit vs open-account trade
Two ways to settle a cross-border sale: a letter of credit, where a bank promises to pay the exporter against compliant documents, or open-account trade, where the exporter ships and then invoices, trusting the importer to pay when due. The two sit at opposite ends of the risk-and-cost trade-off, with documentary collection in between.
| DIMENSION | Letter of credit | Open-account trade |
|---|---|---|
| Risk allocationThe choice usually reflects how well the parties know and trust each other, and the corridor they trade in. | The exporter relies on a bank's promise, not the buyer's, so payment risk shifts toward the banks; the importer's risk is that documents, not goods, drive payment. | The exporter carries the payment risk: goods and documents are sent ahead, and if the importer does not pay when due there is no bank undertaking to fall back on. |
| Role of the banks | Banks are principals in the payment: the issuing bank owes payment against compliant documents, and an advising or nominated bank handles the exporter's side. | Banks are mainly a payment channel — the exporter's invoice is settled by an ordinary credit transfer — unless separate trade finance is arranged around it. |
| Cost | Higher: issuance, advising, confirmation, amendment, and document-examination fees add up, reflecting the bank undertakings and the handling of documents. | Lower on the payment itself — the cost of a normal transfer — though the exporter may pay separately for credit insurance or financing to offset the risk it retains. |
| Speed | Slower: the credit must be issued, advised, documents prepared, presented, examined for compliance, and only then is payment authorised — a multi-step documentary cycle. | Faster to settle once goods are delivered: the payment is a straightforward transfer on the agreed due date, with no documentary examination gating it. |
| When it is used | Where trust is limited — new relationships, higher-risk corridors, or large one-off shipments — and the parties accept cost and paperwork to secure payment. | Where trust is established — repeat counterparties, group companies, or stable corridors — and the parties prefer low cost and speed over a bank guarantee. |
Sources for this comparison2
- Scheme-specific rule
Swift Standards MT (annual standards releases) ↗ — Swift · category 7 documentary credits
Full field-level specifications live in the Swift Knowledge Centre User Handbook behind a swift.com login. Coexistence for in-scope FI-to-FI payment instructions ended on 22 November 2025, but treatment differs by MT: some instructions are NAKed and selected messages can enter temporary, chargeable contingency conversion. Reporting, initiation, investigations and correspondence follow separate roadmaps.
- Simplified educational illustration
Payments Signal editorial teaching models — Payments Signal
What this simplifies: Trade-finance practice is governed by trade rulebooks and contracts not verified against a primary source this pass. The comparison reduces a spectrum of settlement methods to two archetypes and omits documentary collection detail and financing variants.
Used wherever diagrams, scenarios, figures, or example values are didactic constructions rather than sourced facts; every such use carries a simplifications disclosure. All people, companies, banks, and list entries in examples are fictional.