Export payment methods run from safest to riskiest for the seller: advance payment, documentary credit (letter of credit), documentary collection and open account (with or without credit insurance). The right choice depends on how far you trust the buyer, the country risk and what the market accepts: the more security you ask for, the more cost and commercial friction you take on.
What payment methods are there in exporting?
There are five common options, ordered from most to least secure for the exporter:
- Advance payment or prepayment: you are paid before shipping, usually by bank transfer. It removes non-payment risk, but strains the buyer's cash flow and gives them less confidence.
- Documentary credit (letter of credit): a bank undertakes to pay you if you present the required documents. It is the safest method after prepayment, but also the costliest and most demanding.
- Documentary collection: your bank sends the documents to the buyer's bank, which releases them only against payment or acceptance. It is cheaper, but banks only act as intermediaries.
- Open account: you ship and are paid later, relying on the customer. It is the most competitive commercially and the riskiest.
- Consignment: the distributor pays only for what it sells and returns the rest. It is the least secure option.
In practice they are combined: for example, a deposit when the order is confirmed and the balance by letter of credit or on insured credit terms.
How does documentary collection work?
You hand the shipping documents (invoice, transport document and so on) to your bank with precise instructions. Your bank forwards them to the importer's bank, which releases them to the buyer in exchange for payment (at sight) or acceptance of a bill of exchange (term). It is governed by the International Chamber of Commerce's URC 522 rules.
Its advantage is cost, lower than a letter of credit. Its limit is serious: banks act as intermediaries, do not vet the buyer and do not guarantee payment. If the customer does not take up the documents, the goods are left at destination and your recourse is limited. That is why we only recommend it with buyers who have some track record, in stable countries.
Is a letter of credit the safest option?
After advance payment, yes. According to the Bank of Spain's Bank Customer Portal (in Spanish), it offers greater security in collecting international payments: the importer's bank pays if the documents are in order. It is governed by the ICC's UCP 600 rules. The parties are the importer, its issuing bank, your bank and, sometimes, a confirming bank.
Key points before you accept one:
- It must be irrevocable: a revocable credit can be amended or cancelled before payment and offers almost no protection.
- Confirmed, if the issuing bank or the country worries you: a second bank, normally in the exporter's country, guarantees payment on top of the issuing bank.
- Flawless documents: if the documents do not match the terms exactly, you may not be paid. Check the credit's wording before you start production.
- At sight or deferred: define when the money reaches you.
The drawback is bank cost and paperwork, which can make you less competitive against sellers offering open account.
What about open account with credit insurance?
Many European buyers expect to pay on credit terms. Selling on open account makes you more competitive, but you carry the full non-payment risk. Credit insurance reduces it: in Spain, CESCE manages, on behalf of the State, export credit insurance covering commercial, political and extraordinary risks, and also offers commercial credit insurance against non-payment by domestic and foreign customers (check current terms and cover with CESCE). Private insurers also operate in this segment.
Insurance usually requires the customer to be rated and risk limits to be respected, so it does not spare you from vetting who you sell to.
How do you choose by customer and country?
- New customer in a high-risk country: prepayment, or a confirmed letter of credit.
- New customer in the EU: partial deposit plus insured balance, or collection if the amount is moderate.
- Customer with a track record: open account with a credit limit and insurance.
- Small, recurring orders: deposit on the first order and credit terms from the second, if they pay on time.
- Distributor asking for consignment stock: only with a clear contract, regular stock counts and guarantees.
Avoid three common mistakes: accepting a letter of credit without reading it, shipping without written payment terms, and not aligning the Incoterm with the payment method. On the last point, see which Incoterm to choose when exporting (in Spanish) and our practical guide to exporting.
How Vycte helps you
At Vycte we advise on export documentation, Incoterms and getting paid as part of our tailor-made export service: we help you set payment terms by market and customer. Our role is advisory; shipping is handled by your freight forwarder. If you want to review your case, talk to us.
Frequently asked questions
What is the safest way to get paid when exporting? Advance payment is the safest for the seller, followed by an irrevocable, confirmed letter of credit. They also create the most friction with the buyer.
What is the difference between collection and a letter of credit? With a letter of credit the bank gives a payment undertaking if the documents meet the terms; with collection the banks only handle the release of documents against payment and do not guarantee you will be paid.
Can I sell on open account without taking all the risk? Yes, with credit insurance and prior vetting of the customer, always within the risk limits the insurer sets. Even so, insurance has conditions and exclusions: read them before relying on it.
