This page names the main payment methods a factory meets on a purchase order, for a merchandiser, factory owner, or finance clerk who reads purchase orders for a living. This lesson mainly teaches information: the four payment methods a factory commonly sees, and what each one asks the factory or the buyer to do. At work, a factory reads a purchase order and finds a payment method written into it, alongside the price and the quantity. That payment method decides who commits money first, the buyer or the factory, and what happens if the other side cannot pay.
Delta Garments meets more than one payment method across its customers. Northline Apparel's export orders are paid by letter of credit at shipment. A new buyer with no history might be asked for advance payment before production starts. A different new buyer might offer documentary collection, or ask for open account terms from its first order. Without knowing what each method means, a merchandiser cannot tell whether a payment method is normal, cautious, or risky. This lesson names each method plainly, so later lessons can compare and choose between them.
You need: no earlier lesson. Course 7's lesson on payment terms and cash flow is useful background on how a payment term changes when cash arrives, but this lesson is self-contained.
By the end of this lesson you can:
Not covered here: how each method compares on risk (lesson 1.2); how to choose a method for a new buyer relationship (lesson 1.3); what changes a factory's risk on an order already confirmed (lesson 1.4); deciding the right method for a live new order (lesson 1.5).
| Term | Meaning |
|---|---|
| Advance payment | A payment method where the buyer pays the factory some or all of the price before production starts or before the goods ship, most protective for the factory. |
| Letter of credit | A bank promise to pay the factory once the shipping documents match the order. |
| Documentary collection | A payment method where the factory's bank forwards shipping documents to the buyer's bank, releasing them to the buyer only against payment or a signed promise to pay, without a bank guarantee like a letter of credit. |
| Open account | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Payment terms | The part of a purchase order stating when and how the factory is paid, for example letter of credit at shipment or open account. |
| Deposit | A partial payment made before an order is finished. The rest, the balance, is usually paid on shipment. |
Every purchase order names a payment method, alongside price and quantity. The payment method answers one question: which side, the buyer or the factory, has to commit money or goods before the other side does, and whether a bank sits between them to guarantee the promise. Four payment methods cover almost every purchase order a factory meets: advance payment, letter of credit, documentary collection, and open account. Each one moves the point of first commitment to a different place along the order's timeline.
| What can differ | The shapes you will meet | Why it matters |
|---|---|---|
| Export, new buyer, no history | A new export buyer with no track record may be asked for advance payment, part or all of the price paid before production starts, since Delta Garments has no basis yet to trust the buyer's later payment. | The factory holds cash before committing fabric and labour, protecting it from a buyer who might not pay at all. |
| Export, established buyer | Northline Apparel's own export orders, including Order A, are paid by letter of credit at shipment: Northline Apparel's bank promises to pay once shipping documents match the order. | A bank's promise replaces trust built on history alone, so the factory can safely extend credit to the shipment date. |
| Export, mid-trust buyer | A buyer partway between a stranger and a long-standing partner may be offered documentary collection: the factory's bank sends shipping documents to the buyer's bank, released only against payment or a signed promise to pay. | No bank guarantees payment under documentary collection, so the factory still carries real risk, though less than shipping with no documents held back at all. |
| Domestic, long-standing buyer | Cedar & Co., a domestic brand with an established relationship with Delta Garments, buys on open account: Delta Garments ships first and is paid an agreed number of days later, commonly 30, 60 or 90 days, with no bank guarantee. | The factory extends the most credit of any of the four methods, appropriate only where trust is already established. |
Order A is Delta Garments' export run for Northline Apparel: 15,000 basic cotton T-shirts at a FOB price of USD 3.20 each, an order value of USD 48,000. Northline Apparel is an established buyer with its own shops and a long buying history with Delta Garments, so its purchase order names letter of credit at shipment as the payment method: Northline Apparel's bank promises to pay Delta Garments once the shipping documents match the order. Delta Garments never has to ask whether Northline Apparel itself will pay; the bank's promise stands in its place.
| Order | Buyer | Payment method | Who commits money first |
|---|---|---|---|
| Order A | Northline Apparel (export, established) | Letter of credit at shipment | Northline Apparel's bank, once documents match |
| Equivalent-value domestic order | Cedar & Co. (domestic, established) | 60-day open account | Delta Garments, by shipping before being paid |
Both orders are worth the same money. The payment method, not the price, decides which side commits first.
The worked numberDelta Garments currently runs four purchase orders side by side, one under each payment method, to see how the mix looks in practice.
Delta Garments reviews one order under each of the four methods: advance payment, letter of credit (Order A), documentary collection, and open account.
A common mistake is treating a number of days, such as "30 days" or "60 days," as the payment method itself, when it is really a term attached to open account or to a letter of credit. "60 days" alone does not say whether a bank guarantees the payment or whether the factory is trusting the buyer directly; "60-day open account" and "letter of credit at 60 days sight" are very different arrangements that happen to share a number. A merchandiser who reads only the number of days, without naming which of the four methods it belongs to, cannot tell how much risk the order actually carries.
This mistake costs real money when it goes unnoticed. A factory that assumes "60 days" always means a bank-guaranteed letter of credit, when the purchase order actually names open account with no bank at all, has quietly agreed to carry the buyer's payment risk directly for two full months after shipment. The fix costs nothing but a careful reading of the payment terms line, and a short question back to the buyer whenever the wording does not name one of the four methods plainly.
A purchase order names a payment method alongside its price and quantity. Advance payment means the buyer pays some or all of the money before the factory starts making the goods. A letter of credit means a bank promises to pay the factory once shipping documents match the order. Documentary collection means the factory's bank sends the documents to the buyer's bank, but no bank promises the money will actually be paid. Open account means the factory ships first and waits an agreed number of days to be paid, trusting the buyer directly with no bank in between. The same order value can sit behind any of these four methods, and each one asks a different side to trust the other first.
A new export buyer, placing its first order with Delta Garments, sends a purchase order for 6,000 T-shirts. The payment terms line reads only "payment: 45 days," with nothing else stated.
Can Mona treat "payment: 45 days" as a complete payment method, or does she need to ask the buyer more before accepting the order? Decide before opening the answer.
She needs to ask the buyer more. "Payment: 45 days" names a term, a number of days, but not one of the four payment methods, so it does not yet say which method is being offered.
First, Mona must ask whether a bank guarantees the payment, which would make this a letter of credit at 45 days sight, or whether no bank is involved, which would make this open account at 45 days, a very different level of risk for a brand-new buyer with no history.
Second, if the answer is open account, Mona must weigh that a brand-new export buyer with no track record is being offered the payment method that normally suits an established, trusted relationship like Cedar & Co.'s. Accepting open account terms from an unknown new buyer, without checking further, risks the whole USD-value of the order should the buyer fail to pay after the goods have already shipped.
Using an order of similar scale to Order A as the amount at stake: 6,000 pieces at a similar FOB price of about USD 3.20 gives an order value at risk of USD 19,200.
If Delta Garments ships this order under an unconfirmed open account arrangement to a brand-new buyer, and that buyer does not pay, the entire USD 19,200 is at risk, since no bank promise stands behind the payment as it would under a letter of credit.
Confirming the payment method before shipping costs Delta Garments nothing but a short delay to ask the buyer a clarifying question. That small delay is far cheaper than shipping USD 19,200 of goods against a payment method that turns out to carry no bank guarantee at all.
Open the course workbook's Decide sheet. For a new purchase order, enter the exact wording of its payment terms line, then use the sheet to confirm which of the four standard methods, advance payment, letter of credit, documentary collection, or open account, that wording actually describes, and whether a bank is named.
Download the full working sheet, with Order A's letter-of-credit entry already filled in, from the link on this course's page.
1. What do the four main payment methods, advance payment, letter of credit, documentary collection, and open account, each fix?
2. A purchase order's payment line reads 'payment: 30 days' with no mention of a bank. Which payment method is this most likely to be?
3. Delta Garments is offered documentary collection by a new buyer for a 4,000-piece order. What does this method actually guarantee Delta Garments?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Advance payment | دفعة مقدمة قبل الإنتاج | Paiement anticipé | Peşin ödeme | A payment method where the buyer pays the factory some or all of the price before production starts or before the goods ship, most protective for the factory. |
| Letter of credit | اعتماد مستندي | Lettre de crédit | Akreditif | A bank promise to pay the factory once the shipping documents match the order. |
| Documentary collection | التحصيل المستندي | Encaissement documentaire | Vesaik mukabili tahsilat | A payment method where the factory's bank forwards shipping documents to the buyer's bank, releasing them to the buyer only against payment or a signed promise to pay, without a bank guarantee like a letter of credit. |
| Open account | حساب مفتوح | Compte ouvert | Açık hesap | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Payment terms | شروط الدفع | Conditions de paiement | Ödeme şartları | The part of a purchase order stating when and how the factory is paid, for example letter of credit at shipment or open account. |
| Deposit | دفعة مقدمة | Acompte | Kapora | A partial payment made before an order is finished. The rest, the balance, is usually paid on shipment. |
You now know the four main payment methods a factory meets. The next lesson lines them up on the risk spectrum that runs between buyer and factory, and shows why each method sits where it does. Back to the course map