Getting paid by overseas customers: payment methods ranked by risk and cash

Winning an overseas buyer is hard work. Getting paid by them shouldn’t be. Yet the payment method is often settled in a rush at the end of a negotiation — “they want 60 days, fine” — when it’s one of the biggest decisions in the deal. It decides how much risk you carry, how much working capital you need and how quickly you can take the next order.

business.gov.au notes that exporters might take longer to get paid by overseas customers. The method you choose decides how much longer, and how certain.

What are the main ways to get paid?

From safest for the exporter to riskiest:

Method	How it works	Exporter’s risk	Working capital needed
Payment in advance	Buyer pays before you ship	Lowest	Lowest
Letter of credit	Buyer’s bank undertakes to pay against compliant documents	Low, if documents comply	Moderate — you fund production and any usance period
Documentary collection	Banks release documents against payment or acceptance	Moderate	Moderate
Open account	You ship and invoice on terms	Highest	Highest

Most exporters use more than one, depending on the buyer.

When does payment in advance make sense?

Payment in advance — or a large deposit before production — is ideal for exporters. It removes the risk of non-payment and funds your production. It’s realistic when:

• your product is scarce, custom-made or in high demand
• orders are small enough that the buyer doesn’t mind
• the buyer is new and understands you need security
• it’s a sample or trial order

Many exporters use a hybrid: part-payment in advance (to cover materials) and the balance before documents are released. It shares risk and is often acceptable to buyers who’d refuse full prepayment.

Watch the GST timing. The ATO says exported goods are GST-free if they’re exported within 60 days of the earlier of receiving payment or issuing an invoice. A prepayment can start that clock long before a long production run finishes. See GST-free exports and cash flow.

When is a letter of credit worth the paperwork?

A letter of credit is a bank’s undertaking, issued at the buyer’s request, to pay you when you present documents that comply exactly with its terms. Most are issued under the ICC’s UCP 600 rules.

Use one when:

• the order is large relative to your business
• you don’t know the buyer, or the market carries higher risk
• the buyer can’t or won’t prepay but can arrange a credit with their bank

The catches: documents must comply exactly, fees apply, and under a usance credit you still wait for payment. A confirmed letter of credit adds a second bank’s undertaking, useful where the issuing bank or country is a concern.

Where do documentary collections fit?

A documentary collection routes your shipping documents through banks. Under “documents against payment”, the buyer gets the documents — and so the goods — only when they pay. Under “documents against acceptance”, they accept a bill of exchange promising to pay on a future date. The ICC’s URC 522 rules generally apply.

It’s cheaper and simpler than a letter of credit, but the banks don’t undertake to pay. If the buyer refuses the documents, your goods are sitting in a foreign port. Collections suit established relationships where you want some control over the goods without the full cost of a letter of credit.

When is open account the right call?

Open account — ship now, invoice on terms — is what buyers prefer, and in competitive markets it can be the price of winning the business. Use it when:

• the buyer has a solid track record with you
• the amount at risk is one your business could survive losing, or it’s insured
• the market is competitive and rivals offer terms

Protect yourself with:

• Credit checks and trade references before the first order.
• Credit limits per buyer, reviewed as the relationship grows.
• Trade credit insurance, which covers a share of losses if an insured buyer doesn’t pay for a covered reason.
• Clear terms — especially when the clock starts. See overseas buyer payment terms.

How do you choose for a particular order?

Ask five questions:

1. How well do I know this buyer? New buyers point to prepayment or a letter of credit.
2. How big is the order relative to my business? The bigger the order, the more security you need.
3. What’s the market like? Higher-risk markets point to a letter of credit, ideally confirmed.
4. What do competitors offer? If everyone offers 60 days’ open account, demanding prepayment may lose the deal.
5. Can I fund the wait? Whatever the method, you need working capital to cover production and the time until payment.

How much working capital does each method need?

Illustrative only. An exporter with $80,000 of production costs on a $120,000 order, with six weeks of production and four weeks at sea:

Method	When cash comes back	Approximate days funded
50% prepayment, 50% before documents released	Half at order, half around shipment	~42 days on half the cost
Letter of credit at sight	On presentation of documents, around shipment	~45–50 days
Letter of credit, 90 days after bill of lading	90 days after loading	~135 days
Open account, 60 days from arrival	60 days after arrival	~130 days

The difference between the top and bottom of that table is months of production costs sitting on your balance sheet. Your export working capital needs follow directly from the method you accept.

If a method your buyer wants would stretch you, a quick enquiry gets a real person looking at the funding side, with no credit check to ask.

What about currency?

If you invoice in the buyer’s currency, what you receive depends on the exchange rate when the payment lands and converts. The longer the terms, the longer you’re exposed. Some exporters invoice in local currency; others fix a rate with their bank for expected receipts. The Reserve Bank publishes daily exchange rates, a useful reference for tracking what a receivable is worth. See exchange-rate timing.

What habits get exporters paid on time?

• Put payment terms, the trigger date and your bank details on every invoice.
• Send documents promptly and accurately — many delays come from paperwork.
• Confirm receipt of the invoice and documents with the buyer.
• Follow up a week before the due date, not a week after.
• Verify any change to your own or the buyer’s bank details directly, by phone.
• Keep proof of export — the export declaration details and bill of lading — for GST purposes. business.gov.au notes most goods over $2,000 need an export declaration.

How should the method change as a relationship grows?

Payment methods aren’t fixed for life. A common path looks like this:

1. First order — part-payment in advance plus the balance before documents are released, or a letter of credit.
2. Next few orders, paid on time — a documentary collection, or a smaller advance with the balance against documents.
3. An established buyer with a clean record — open account on agreed terms, with a credit limit and, ideally, trade credit insurance.

Each step makes you more attractive to the buyer and increases the working capital you need. Before agreeing to the next step, ask two questions: could the business absorb this buyer not paying the next invoice, and can we fund the longer wait? If either answer is no, the step can wait — or the risk and funding need sorting first. Revisit terms at least once a year, and immediately if a buyer starts paying late, changes ownership or asks for a sudden jump in volume.

Choose the method, then fund the wait

The right payment method protects you from not being paid; the right funding protects you while you wait. If your export orders are stretching the business, start a Trade Loan enquiry. It takes about a minute and doesn’t involve a credit check. We don’t hand your enquiry to a pile of lenders — one real person looks at your buyers, your terms and your production timeline, then calls you. Please be accurate about order values and payment methods so we can help you properly first time.