Getting Paid & Managing Financial Risk When Exporting

The financial risk in international trade

Selling internationally introduces a category of risk that domestic trade largely avoids: the risk of not getting paid. Your buyer is in another country, operating under a different legal system, and the goods may have left your premises — or even arrived at their destination — before payment is confirmed. How you structure the commercial arrangement around payment is one of the most important decisions in any export transaction.

The right payment method for any given transaction depends on several factors: how well you know the buyer, how established the trading relationship is, the country involved, the value of the goods, and how much risk each party is willing to carry. There is no single right answer — but there is a spectrum, and understanding where different methods sit on it is the starting point.

The main payment methods in international trade

Payment methods in international trade range from those that carry the most risk for the exporter to those that offer the most protection.

Open account is the most common method in established trading relationships. The goods are shipped and the buyer pays within an agreed period — 30, 60, or 90 days, for example. It is straightforward and convenient, but it places the risk entirely with the seller. If the buyer does not pay, the goods have already gone. Open account works well where trust has been established over time, but it is a significant exposure when used with a new buyer or in a high-risk market.

Advance payment sits at the other end of the spectrum. The buyer pays before the goods are shipped, transferring the risk entirely to them. It is the most secure option for the exporter, but not all buyers will accept it — and in competitive markets, insisting on it can cost you the sale.

Documentary collections sit in the middle. The exporter ships the goods and passes the documents to their bank, which forwards them to the buyer’s bank. The buyer can only obtain the documents — and therefore the goods — once they have either paid or committed to pay on a future date. It offers more protection than open account but less than a letter of credit, and it depends on the buyer’s willingness and ability to pay when the documents arrive.

Letters of credit offer the highest level of protection in standard trade finance and are covered in more detail below.

Letters of credit — payment security with conditions attached

A letter of credit (LC) is a commitment by the buyer’s bank to pay the exporter, provided that the exporter presents the correct documents within the terms and timeframe specified in the LC. It shifts the payment risk from the buyer to the bank — a significantly more secure position for the exporter.

That security comes with conditions. The documents presented must comply precisely with the terms of the LC — the right documents, in the right format, with the right information, presented within the specified timeframe. A discrepancy between the documents and the LC terms can result in the bank refusing to pay, even if the goods have been delivered and the buyer is satisfied. Discrepancies are common, and they are almost always avoidable with the right preparation and attention to detail.

Letters of credit are most commonly used for high-value transactions, new trading relationships, or trade with buyers in markets where payment risk is higher. They require both the exporter and the buyer to engage with their respective banks, and they involve cost and administrative process on both sides. For buyers, they also tie up credit lines — which is why some buyers resist them even when the exporter would prefer the protection.

Understanding how an LC works, what the documents need to contain, and how to identify and resolve discrepancies before presentation are the details that determine whether the security an LC offers is real or theoretical.

Currency risk — a risk many exporters underestimate

If you invoice in a currency other than sterling, the value of what you receive in pounds depends on the exchange rate at the time of payment. For a business with tight margins, a movement in the exchange rate between invoicing and payment can turn a profitable sale into a loss.

Currency risk is not inevitable — it can be managed. Forward contracts, for example, allow you to fix the exchange rate for a future payment, removing the uncertainty. The right approach depends on your volumes, your margins, and your appetite for exposure. This is specialist financial territory, and the right place to start is with a foreign exchange specialist or your bank rather than a guide to exporting.

Export credit insurance — protecting against non-payment

Export credit insurance covers the exporter against the risk of a buyer failing to pay — whether because of insolvency, default, or in some cases political events in the buyer’s country that prevent payment. It can be particularly valuable when trading with new buyers, in higher-risk markets, or where the value of individual transactions is significant.

UK Export Finance (UKEF), the UK government’s export credit agency, offers a range of products designed to support UK exporters — including guarantees, insurance, and financing options that may not be available through commercial providers. It is worth being aware of as a resource, particularly for businesses exploring new or challenging markets. More information is available at ukexportfinance.gov.uk.

Red flags — signs a buyer may not pay

Experience in international trade tends to produce a list of warning signs that experienced exporters learn to take seriously. Buyers who are unusually resistant to standard payment terms, who are vague about their import arrangements, who push hard on price but are indifferent to delivery timelines, or who request unusual documentation arrangements are all worth pausing on.

Due diligence on new buyers — checking their creditworthiness, understanding their market, and taking up references where possible — is not bureaucracy. It is the commercial equivalent of checking your proof of export: something that feels like extra effort until the moment you need it.