Which trade finance option best protects an exporter against non-payment?

It depends how much protection you need and what your buyer will agree to, because the strongest options are also the ones a buyer is least keen on.

The options, strongest first

Confirmed letter of credit. The buyer’s bank undertakes to pay against compliant documents, and a second bank, usually in the UK or another market you trust, adds its own confirmation. That confirmation is the valuable part: you are no longer relying on your buyer, on your buyer’s bank, or on the stability of their country. You are relying on a bank you chose. This is the strongest protection available and the most expensive.

Unconfirmed letter of credit. The same undertaking without the second bank. You have removed buyer risk but you still carry the issuing bank and country risk. Fine for a solid bank in a stable market, less so otherwise.

Export credit insurance. Insures the receivable rather than guaranteeing it. You ship on open account terms and claim if the buyer fails to pay. Weaker than a letter of credit, because you are claiming after a loss rather than being paid on presentation, but far cheaper, much easier commercially, and it can cover a whole book of buyers rather than one shipment at a time. For most exporters selling repeatedly to the same customers, this is the practical answer.

Documentary collection. Your bank releases the shipping documents to the buyer only against payment or acceptance. Cheaper than a letter of credit and better than nothing, but there is no bank guarantee. If the buyer simply declines to collect, you have goods sitting in a foreign port and a problem.

Open account with bad debt protection. Where you already use invoice finance, adding bad debt protection shifts some of the buyer risk to the funder for a fee. Convenient if the facility already exists.

UK Export Finance, the government’s export credit agency, can support several of these where commercial cover is unavailable.

What triggers release of funds

Under a letter of credit, one principle governs everything: banks pay against documents, not against goods.

The bank never inspects your shipment. It examines the paperwork, and if the paperwork complies with the credit exactly, it pays. If it does not, it can refuse, even where the goods arrived perfectly and on time.

A typical document set is:

• Bill of lading or air waybill, proving despatch.
• Commercial invoice, matching the credit precisely on description, value and terms.
• Packing list.
• Insurance certificate, where the credit requires it.
• Certificate of origin, and any inspection or quality certificate the credit specifies.

The part that catches exporters out

A large share of first presentations are rejected for discrepancies, and they are almost always trivial: a description that does not match the credit word for word, a date outside the shipment window, a missing signature, a document presented after the presentation period closed.

A discrepancy converts your bank-guaranteed payment back into an ordinary request for the buyer to pay. Everything you paid for the protection is undone by a typing error.

Two practical defences. Read the credit properly before you ship, while the terms can still be amended, rather than after. And check the presentation deadline, because it is the one nobody diarises.

Choosing between them

For a single large order to an unfamiliar buyer in a difficult market, a confirmed letter of credit earns its cost. For regular shipments to established customers, insurance on open account terms is usually the better commercial answer, because insisting on letters of credit every time will cost you the business.

Tell us who you are selling to, where, and how often, and we will set out which structure fits and what it will cost.