Secure Payments in UAE Trade 2025: Letter of Credit vs. TT
For any exporter, the nightmare scenario is not a lost shipment or a customs delay; it is shipping goods and never getting paid. While the UAE is a stable market with a strong rule of law, commercial disputes, bankruptcy, and payment defaults are realities of international trade. In the post-2020 economic landscape, cash flow is king.
Many new Indian exporters, eager to win their first order from a Dubai buyer, make the fatal mistake of agreeing to unsafe payment terms. They treat the export order like a domestic sale. This guide analyzes the four primary payment mechanisms used in India-UAE trade and ranks them by risk.
1. Telegraphic Transfer (TT) / Wire Transfer
This is the simplest method, equivalent to an NEFT/RTGS transaction. However, the timing of the transfer dictates the risk.
Scenario A: Advance TT (The Gold Standard)
The buyer sends the money before you ship.
Risk Profile: Zero for Exporter. High for Buyer.
Strategy: For new buyers in Dubai who you have never met, insist on 100% Advance for the first three shipments. If they refuse, negotiate a split: 30% Advance to cover your packing/material costs, and the balance against a scan of the Bill of Lading.
Scenario B: Open Account (The Danger Zone)
You ship the goods, and the buyer promises to pay 30, 60, or 90 days later.
Risk Profile: Extreme. You have lost possession of the goods and have not received payment. If the buyer defaults, your legal recourse in UAE courts is expensive and slow.
Advisory: Never agree to Open Account terms with a new buyer, no matter how big their office looks. Only reserve this for long-term partners (3+ years of relationship).
2. Letter of Credit (LC)
The LC is a bank-to-bank commitment. The buyer's bank (Issuing Bank) guarantees payment to your bank (Advising Bank) provided you submit compliant documents.
Why Use an LC?
It eliminates the "trust deficit." You don't need to trust the buyer; you only need to trust the bank. Since UAE banks (like Emirates NBD, ADCB, Mashreq) are highly rated, the default risk is near zero.
The "Confirmed" LC Advantage
For extra safety, ask for a "Confirmed LC." This means an Indian bank adds its own guarantee to the UAE bank's guarantee. If the UAE bank fails (unlikely, but possible during geopolitical crises), the Indian bank pays you.
The Downside: LCs are strict. A single spelling mistake (e.g., "Dubai" spelled as "Dubia") in the Bill of Lading is considered a "Discrepancy." The bank can refuse payment or charge a penalty ($50-$100 per error). Ensure your documentation team is meticulous.
3. Cash Against Documents (CAD) / DP
This is the "Middle Path."
Mechanism: You ship the goods and submit documents to your bank. Your bank sends them to the buyer's bank in Dubai. The buyer's bank releases the documents only after the buyer pays the money.
The Dubai Nuance: While safer than Open Account, CAD has a hidden risk. If the market price of your product drops while the ship is on the water, the buyer may simply refuse to accept the documents. Your goods are then stuck at Jebel Ali Port, racking up demurrage charges. You are left with two bad choices: pay to ship them back to India or sell them at a distress price to a shark in Dubai.
4. The Ultimate Safety Net: ECGC Policy
Regardless of the payment term (even for LCs), every Indian exporter must have a policy from the Export Credit Guarantee Corporation (ECGC).
What it Covers: ECGC covers 80-90% of your loss if the foreign buyer goes bankrupt or defaults due to political reasons (e.g., war).
Cost: The premium is negligible (approx 0.5% to 0.8% of the invoice value).
The Strategy: Before accepting an order, ask ECGC to set a "Credit Limit" on the UAE buyer. If ECGC refuses to give a limit on that specific buyer, take it as a massive red flag and walk away from the deal.