Getting paid: terms, instruments and reality

Companies entering a new market negotiate hard on price and casually on payment terms. The second decision determines whether the first one matters.

The instruments, in order of security

Advance payment. Completely secure for the seller and commercially difficult, because it puts the entire risk on the buyer and few will accept it beyond a first transaction.

Documentary letter of credit. A bank undertakes to pay against documents proving shipment. Secure, well understood internationally, and slower and more expensive than people expect — every document must match the credit exactly, and discrepancies are the normal reason payment is delayed.

Bank guarantee or standby credit, which sits behind an open account arrangement and is called only if payment fails.

Documentary collection, which is cheaper than a credit and gives less protection: the bank handles documents but does not guarantee payment.

Open account, which is normal between established partners and is unsecured credit by another name.

Credit insurance

Frequently the practical answer for ongoing trade: insure the receivable, sell on open account, and let the insurer assess the buyer. Export credit agencies in most European countries cover trade with Ukraine, and their appetite has broadened.

The practical advice

For a first transaction with a new counterparty, use a secured instrument even if it costs margin. Move to open account when you have a payment history, not when the counterparty asks.

And check who you are actually contracting with. A well-known trading name may be a small entity with no assets, and a guarantee from the group is worth having in writing before you ship.

In a new market the most expensive mistake is not missing a sale but making one and not being paid — and a firm that makes it once usually withdraws from that market. My own rule is that the first three shipments go on a letter of credit and everything after that depends on the record. It looks rigid, but in twenty years it is why the receivables I never collected can be counted on one hand.