Why Payment Risks in Exports Matter More Than Ever
In export business, production and shipment are visible milestones — but real success begins only when payment is credited to the exporter’s bank account.
Many Indian exporters suffer not due to lack of orders, but due to payment risks in exports such as delayed remittances, bank controls, or buyer-side issues. Choosing the wrong export payment method can lock your cash flow for months.
This article explains export payment methods, their real risks, and especially the hidden realities of letter of credit payment risk, based on practical exporter and banker experience.
you may also like to read: MT103 Swift Message After ISO 20022: Is It Still Valid Payment Proof for Exporters?
Understanding Payment Risks in Exports
Payment risks in exports arise because:
- Buyer and exporter operate under different laws
- Multiple banks are involved
- Currency conversion and foreign exchange controls apply
- Country risk, sanctions, and compliance checks intervene
That’s why exporters must evaluate how LC payment works, not just whether an LC exists.
Export Payment Methods Explained (Risk Perspective)
The three most common export payment methods are:
- Advance Payment
- Letter of Credit (LC)
- Open Account
Each carries a different level of payment risk.
Advance Payment in Exports: Lowest Risk, Limited Acceptance
What Is Advance Payment?
Advance payment means the importer pays before shipment.
Risk Analysis
| Factor | Risk Level |
|---|---|
| Exporter risk | Very Low |
| Buyer risk | High |
| Payment certainty | Very High |
When Advance Payment Works Best
- New buyers
- Customized or made-to-order goods
- High-risk countries
Limitation
While advance payment removes most payment risks in exports, buyers often resist it, making exporters less competitive.
Letter of Credit Payment Risk: Safer, But Not Risk-Free
What Is a Letter of Credit?
A Letter of Credit is a bank’s conditional commitment to pay the exporter against compliant documents.
At first glance, LCs appear safe. However, letter of credit payment risk is often misunderstood.
How LC Payment Works in Reality (Critical for Exporters)
A major myth is that once documents are compliant, LC payment is immediate.
In reality:
- The exporter’s bank (advising or negotiating bank) does not control payment
- The exporter’s account is credited only after the LC issuing bank transfers funds
- The issuing bank fully controls LC payment timing
Even under a Sight LC, payment happens only after:
- Document scrutiny by issuing bank
- Internal approvals
- Foreign exchange & compliance clearance
👉 This is why LC payment delay is common in practice.
Why LC Payments Get Delayed (Even With Clean Documents)
Exporters face LC issuing bank payment delay due to:
- Internal bank processes
- FX controls in buyer’s country
- Sanctions or enhanced compliance screening
- Liquidity or country-level banking stress
In some cases, exporters have experienced sight LC payment time extending from days to several months, especially when LCs are issued by banks in tightly regulated or higher-risk jurisdictions.
Key takeaway:
LC reduces credit risk, but does not eliminate payment delay risk.
Real-Life Case: Sight LC, Clean Documents — Delayed Payment
(Anonymized exporter experience)
An Indian MSME exporter shipped engineering goods under a Sight LC.
- Documents were fully compliant
- Advising bank raised no discrepancies
- Documents were forwarded promptly
Yet:
- The issuing bank delayed remittance citing FX and internal approvals
- Advising bank could not credit funds without receiving money
- Final credit occurred nearly three months later
Lesson:
Even a Sight LC does not guarantee quick cash inflow.
Open Account Payment Risk: Highest Exposure for Exporters
What Is Open Account?
Goods are shipped first; payment is received later (30–180 days).
Risk Analysis
| Factor | Risk Level |
|---|---|
| Exporter risk | Very High |
| Buyer comfort | Very High |
| Recovery difficulty | High |
When Exporters Still Use It
- Long-term trusted buyers
- With export credit insurance
- With factoring or forfaiting
Globally, most export defaults occur under open account payment risk structures.
you may also like to read: Why a Letter of Credit (L/C) is the Backbone of Safe Export-Import Trade — And how I learned to reject bad letter of credit from a suspecious fraudster.
Managing LC Payment Delay: LC Negotiation and Discounting
To manage export payment delay, banks offer LC negotiation and discounting.
LC Negotiation Explained
Under LC negotiation:
- Exporter’s bank examines documents
- If compliant, the bank advances funds to the exporter
- Payment is received before issuing bank remittance
However:
- Negotiation is not automatic
- Often done with recourse
- Issuing bank risk still exists
LC Discounting (Usance LC Payment Risk)
LC discounting applies mainly to usance LCs, where:
- Future payment is discounted
- Exporter receives immediate liquidity
⚠️ Important clarification:
LC negotiation and discounting solve cash-flow problems, not issuing bank risk — unless the LC is confirmed.
How LC Negotiation Has Evolved: An Exporter’s Experience
When I was a new exporter, requesting LC negotiation was extremely difficult.
Despite having a valid LC:
- Banks were highly cautious
- Exporter track record mattered more than LC terms
- I had to approach multiple banks, repeatedly explaining the buyer and issuing bank
What Has Changed Today
Today, if:
- Buyer credibility is strong
- LC is issued by a reputed bank
- Issuing country risk is acceptable
- Exporter maintains a clean banking relationship
banks are far more open to negotiating or discounting LCs.
One thing remains constant:
A good banker relationship still matters.
LC vs Advance Payment vs Open Account (Comparison)
| Payment Method | Exporter Risk | Payment Speed Certainty | Best Use Case |
|---|---|---|---|
| Advance Payment | Lowest | Very High | New buyers |
| Letter of Credit | Medium | Medium | Moderate risk |
| Open Account | Highest | Low | Trusted buyers |
This table summarizes payment risks in exports clearly.
RBI Perspective on Export Payments
Indian exporters must comply with export realisation and reporting rules issued by the Reserve Bank of India.
Delayed export proceeds can attract compliance scrutiny and banking restrictions.
FAQs on Payment Risks in Exports
Is letter of credit safe for exporters?
LC reduces credit risk but does not guarantee fast payment.
Why does LC payment get delayed?
Due to issuing bank controls, FX rules, and compliance checks.
Who controls LC payment — advising or issuing bank?
The issuing bank controls payment timing.
Is LC negotiation without risk?
No, unless confirmed or without-recourse.
Conclusion: How Smart Exporters Think About Payment Risks in Exports
Experienced exporters don’t ask:
“Is LC safe?”
They ask:
“How quickly will this LC convert into cash?”
Advance payment minimizes risk but limits sales.
LC balances risk with timing uncertainty.
Open account increases sales but exposes exporters heavily.
In exports, profit is booked on invoices — survival depends on cash flow.
🔗 Authentic Sources & References (Clickable)
- Reserve Bank of India (RBI)
Master Directions – Export of Goods and Services
👉 https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10265 FEMA Regulations & Export Realisation
👉 https://www.rbi.org.in/scripts/fema.aspx
- International Chamber of Commerce (ICC)
UCP 600 – Uniform Customs and Practice for Documentary Credits
👉 https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/ucp-600/ ICC Trade Finance & Documentary Credits Overview
👉 https://iccwbo.org/global-issues-trends/banking-finance/trade-finance/
- Export Credit Guarantee Corporation of India (ECGC)
Export Credit Insurance & Payment Risk Protection
👉 https://www.ecgc.in/ ECGC – Risk Management for Exporters
👉 https://www.ecgc.in/knowledge-centre/
- World Trade Organization (WTO)
International Trade & Payment Risk Framework
👉 https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm
- Indian Banks – Trade Finance (Reference Level)
State Bank of India – Trade Finance Services
👉 https://sbi.co.in/web/corporate-banking/international-banking/trade-finance (Use for understanding LC negotiation, discounting & remittance practices)
👤 About the Author
Tabrez is an Indian entrepreneur and exporter with hands-on experience in building businesses, navigating exports, and dealing with real-world banking and payment challenges. Through BusinessZindagi.com, he shares practical, experience-driven insights on entrepreneurship, MSMEs, exports, and finance to help business owners make smarter, safer decisions.
⚠️ Disclaimer (Including AI Disclosure)
This article is published for educational and informational purposes only.
- It does not constitute financial, legal, or banking advice
- Export regulations, banking rules, and LC practices may vary by country and bank
- Readers should consult their bankers, trade finance experts, or legal advisors before taking decisions
Some portions of this article may be AI-assisted and have been reviewed and refined to ensure clarity, accuracy, and relevance for Indian exporters.
BusinessZindagi.com shall not be responsible for any business loss arising from the use of this information.
