Advance Payment, Letter of Credit, Assignment of Receivables – Which to Choose in Grain Trading?

Why Payment Terms Matter

In international trade in corn, wheat, rapeseed or soybean meal, the value of a single transaction typically ranges from tens to hundreds of thousands of euros. At such amounts, incorrectly selected payment terms can threaten the company's financial liquidity or lead to real losses. Each party – buyer and seller – has different interests, so it is worth knowing the disadvantages and advantages of the basic instruments.

Advance Payment

The simplest form: the buyer pays all or part of the amount before the goods are shipped.

Advantages for the seller:

• no risk of non-payment,
• improved liquidity before loading.

Disadvantages for the buyer:

• frozen capital before receiving the goods,
• risk of the supplier's failure to deliver.

Advance payment works well in long-term trading relationships with a trusted counterparty or when the transaction volume is relatively small. In the case of a new partner, it is worth combining it with a bank guarantee for the return of the advance payment.

Documentary Letter of Credit (L/C)

A letter of credit is an obligation of the buyer's bank to pay the seller – provided that specified documents are presented (e.g. bill of lading, phytosanitary certificate, quality certificate).

Advantages:

• the seller has certainty of payment regardless of the buyer's financial condition,
• the buyer pays only after confirming shipment in accordance with the contract,
• delivery and quality conditions are verified by the bank.

Disadvantages:

• high banking costs (commissions, margins),
• time-consuming documentation – any discrepancy in the papers may delay payment,
• requires good knowledge of UCP rules (Uniform Customs and Practice for Documentary Credits).

A letter of credit is particularly recommended for transactions with new counterparties outside the EU, large volumes (e.g. full railway wagons of rapeseed oil or sunflower meal) and when the buyer's country is characterized by elevated risk.

Assignment of Receivables

The seller transfers the right to the receivable to a bank or factoring company, which pays him funds in advance (usually 70–90% of the invoice value), and then collects the receivable from the buyer itself.

Advantages:

• immediate improvement in liquidity without waiting for the payment deadline,
• the risk of non-payment can be transferred to the factor (full factoring).

Disadvantages:

• the cost of factoring reduces the margin,
• not every counterparty agrees to the assignment.

Assignment of receivables works well with regular deliveries to established customers, e.g. with cyclical shipments of pellets, soybean meal or urea.

How to Select an Instrument for the Transaction

• New counterparty, large amount → letter of credit or advance payment with bank guarantee,
• Established partner, proven history → deferred payment term with assignment option,
• Market with elevated risk → letter of credit confirmed by a domestic bank.

The selection of payment terms should always take into account the destination country, the financial standing of the counterparty and the cargo value.

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