Getting Paid on Export Orders: Letters of Credit, Collections and Credit Risk

You've shipped the goods. The container is on the water. Somewhere between that moment and the money landing in your account sits the real question of export trade: how do you get paid, and what happens if the buyer doesn't? Getting paid across borders comes down to three tools — letters of credit, documentary collections and open account terms — and the credit risk you carry with each. The choice between them decides who absorbs a default, and it decides it before the first document is ever drawn up.

The three payment routes an exporter actually chooses between

Most export payment terms fall into one of three buckets. Each one shifts risk between you and the buyer differently, and each one costs you time and money in a different place.

Think of it as a spectrum. At one end, the bank stands between you and the buyer. At the other end, you trust the buyer to pay after the goods arrive. The middle option uses documents as a kind of handbrake. Where you land depends on how well you know the buyer and how much you can afford to lose.

The comparison below sets out who carries the payment risk under each method, what the exporter has to do to get paid, and where each route is normally used. Read the risk column first: it tells you more about your exposure than the cost column does.

Notice that only the letter of credit moves payment risk away from you in any meaningful way. The other two leave the risk on your books, even if a bank is involved in moving paper.

Choosing between a letter of credit, documentary collection and open account is a pricing decision as much as a paperwork one. The sequence below works through the mechanics and the risk transfer in the order an exporter or importer actually meets them, from the sales contract to the follow-up after payment.

1. Establish the contract terms first: agree Incoterms, payment currency, the latest shipment date and which document set the buyer will accept, because the letter of credit or collection instruction can only enforce what the sales contract already specifies.
2. Assess the buyer and the country before choosing the instrument — payment history, whether credit insurance or an export credit agency cover is available, and any exchange-control or sanctions constraints on the destination market.
3. Map the risk to the instrument: an irrevocable confirmed letter of credit shifts commercial and, if confirmed by a local bank, country risk to the banks; a documentary collection (D/P or D/A) leaves the buyer's non-acceptance risk with the seller; open account leaves nearly all of it there.
4. Price the gap: add the confirming bank's fee, the discount charged if you need cash before maturity, and the insurance premium to the invoice, then compare that total against the margin you would lose by refusing the order.
5. Draft the credit application with the advising bank, matching every field to the underlying documents — description of goods, tolerance on quantity and amount, ports, latest shipment and expiry dates and the exact list of required documents.
6. Check the draft credit before it is issued, and request amendments for anything unworkable (a short expiry, a certificate you cannot obtain, an ambiguous goods description) rather than trying to fix it after shipment.
7. Prepare documents against the credit's wording, not your usual templates: a single discrepancy — a missing signature, a misspelt consignee, shipment one day late — typically triggers a discrepancy fee and can leave the bank refusing to pay until the buyer waives it.
8. Present documents within the credit's validity and the 21-day default presentation period after shipment, keeping copies of everything presented and the courier record.
9. Track the collection or credit to payment: confirm the negotiating bank has honoured or accepted the draft, follow up on any discrepancy waiver in writing, and log the buyer's performance for the next order's credit limit.

The common failure is not the choice of instrument but the mismatch between it and the paperwork — a confirmed credit only protects you if the documents comply, and a collection only works if the buyer needs the goods more than they need to delay payment. Review limits after each transaction, because a buyer who pays late under a letter of credit will usually pay later under open account, and the credit limit set at the start of the year rarely matches performance by the end of it.

Letters of credit: a bank promise with a paperwork catch

A letter of credit (LC) is a bank's undertaking to pay you, provided your documents meet every term precisely. The bank is not judging your goods. It is judging your paperwork. That is both the strength and the weakness of the instrument.

Strength: if the buyer's bank fails to pay against compliant documents, you have a bank to pursue rather than a buyer in a distant country. Weakness: a single discrepancy — a misspelled address, a late shipment date, a missing endorsement — can turn a clean promise into a stalled payment. Banks deal in documents, not in facts. "The goods were fine" is not an argument that gets you paid under an LC.

Documentary collections: cheaper, but the buyer still decides

In a documentary collection, you ship the goods and hand the documents to your bank. Your bank forwards them to the buyer's bank, which releases the documents to the buyer only when the buyer pays or accepts a draft. It's cheaper than an LC and far less fussy about exact wording.

But the risk is still with you. If the buyer refuses to pay, the documents sit at the buyer's bank and your goods sit in a port, possibly accruing storage charges. You may have to find another buyer, re-export the goods or sell at a loss. Banks in a collection have no obligation to pay you — they only pass documents along. That distinction matters more than most new exporters expect.

Where the credit risk actually sits

Every export decision is a credit decision, and the credit risk doesn't disappear just because a bank is involved. Ask three questions before you pick a payment method: can this buyer pay, will this buyer pay, and who is left holding the loss if the answer to either is no?

The first question is about financial standing — a real assessment of the buyer's ability to pay, not just a trade reference. The second is about behavior under pressure, including when goods arrive late or fail quality checks. The third is the one exporters skip. If the answer is "me," then the payment method isn't really protecting you.

Matching the payment method to the buyer

The right method depends on how much you know and how much you can afford to lose. Run through the checklist below before you quote terms, and treat each line as a question about your own exposure rather than a rule to follow blindly.

• New buyer, unfamiliar legal system, large order: insist on an LC and build in time to review the draft terms before shipment.
• Repeat buyer with a clean payment history: documentary collection can cut cost without adding much risk.
• Long-standing buyer with strong references: open account terms may be worth the risk to keep the relationship and stay competitive.
• Any buyer in a country with currency controls: confirm that the buyer's bank can actually release foreign currency before you ship.
• Any order that would hurt if unpaid: buy credit insurance or use a receivable that can be financed, rather than relying on a single method.

None of these choices is permanent. You can start with an LC and loosen terms as payment history builds. Many exporters do exactly that: the first order is tight, the third is a collection, and by the tenth it's open account with a credit limit.

Common things that break a clean LC

Most LC failures are not disputes about goods. They are small mismatches between what the LC asked for and what the documents say. The usual suspects: shipment made after the latest shipment date, documents presented after the presentation period has run out, a description of goods that differs from the LC wording, missing signatures or endorsements, and insurance cover that doesn't match the required amount.

The fix is simple but requires discipline. Read the LC before you produce anything. Compare each required document against the LC line by line. Build the shipment schedule around the LC's dates, not the other way around. If a discrepancy is unavoidable, ask the buyer's bank early whether it will accept the documents anyway — before the goods ship, not after.

Keeping the paperwork from eating the payment

The payment method tells you who carries the risk, and the documents tell you whether the payment actually happens. The exporter who understands both gets paid on time. The one who focuses only on price and ignores the paperwork ends up chasing money across borders.

Pick the method that matches the buyer and the size of the order. Learn the document rules of that method cold. And keep a clear view of your own credit risk, because the most expensive mistake in export trade is the one you discover after the container has sailed.