Managing payment risks | Royal Bank of Scotland

Managing payment risks

Trading internationally offers huge opportunities for UK firms to find new income channels and better deals from suppliers. However it can seem more complex or riskier than trading within the UK. One of the most common risks perceived from an exporter's (or seller's) viewpoint is whether they will get paid on time. From an importer's (or buyer's) position their risk is concerned with receiving the goods they ordered on time.

Add your signposting title here… The Risk Ladder

Although both parties have a mutual interest in each transaction being successful, their respective interests in relation to the payment terms are very different. Good payment terms to the exporter may mean poor payment terms to the importer, or vice versa. This can be clearly seen in the diagram to the left. Therefore it is important to understand the options before agreeing your sales contract.

International Risk Ladder
Payment solutions explained

Full descriptions of documentary collections and letters of credit can be found in Importing and exporting solutions.

Most transactions whether within the UK, or across international borders, are carried out via 'Open Account'. The exporter ships the goods with an invoice and awaits the payment from the importer. The importer has the advantage as there is no guarantee of payment on time or even payment at all.

Documentary Collection or 'collections' as they are also known can come in two varieties - 'term' and 'sight'. Briefly, the importer's and exporter's banks act as agents in the transaction as they handle and coordinate the payment and exchange of documents in a similar way to a solicitor handling a UK house purchase. 'Term' means that the parties have agreed that the importer will pay at a later date, where as 'sight' means the importer is to pay immediately on receiving the goods. While a collection offers a little more protection for the exporter, the importer's ability to choose when he/she pays is more limited.

Letters of credit offer a good deal of protection when doing business overseas - the payment from the importer is guaranteed by the importer's bank. This product relies on the importer organising a credit facility (subject to status). Providing such a guarantee may give them terms to negotiate a better overall deal price. Letters of credit can also be confirmed at an additional cost, which means that in the event that a payment cannot be made due to general economic or political instability in the importer's country, the payment is still guaranteed, but by the exporter's bank.

Cash in advance means that the exporter receives the payment for goods before they have been shipped. In this situation the importer trusts that the seller will honour the contract and deliver the goods on time and as specified.

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