Protection of the exporter’s interests in international settlements

Mainstream

Protecting the interests of an exporter in international settlements is not about finding the best bank to receive payment. This is the creation of a system in which the non-receipt of money becomes unprofitable for the buyer, and for the exporter - as insured as possible.

The main question is not whether to ship the goods. The main question is how to get paid in full and on time.

Effective protection begins with three checks: What form of settlement corresponds to the level of risk of a particular transaction and jurisdiction.What tools guarantee payment even in case of insolvency of the buyer or political turmoil.

If these issues are not worked out at the contract stage, the exporter risks becoming an unsecured creditor waiting to be transferred from abroad.

When the task of protecting the interests of the exporter arises

The task comes to the fore if:

• The first transaction with a new foreign buyer is concluded;
• delivery is carried out on the terms of deferred payment;
• the amount of the contract is significant for the exporter’s business;
• the country of the buyer refers to jurisdictions with unstable banking system or currency restrictions;
• The payment passes through third countries or complex chains of intermediaries.
• settlements affect sanction jurisdictions;
• the buyer insists on an open account without security;
• the goods are manufactured according to the customer’s specification and cannot be easily resold;
• The contract provides for long delivery times or installation of equipment.

The mistake most exporters make

Most companies start with the question: How to ship the goods faster and get the signed certificate?

That's the wrong first question.

The right question is: How can we ensure the certainty and irrevocability of payment so that commercial success does not depend solely on the good faith of the buyer?

Sometimes the best protection is provided by a documentary letter of credit. Sometimes it is an advance or a bank guarantee. Sometimes it is a combination of coverage through an export insurance agency and factoring without regression. Sometimes a standby letter of credit (standby LC) under the law of the United States or the United Kingdom. The choice of tool is a risk assessment function, not a standard condition.

Step 1. Select the optimal form of international calculations

The first and key step is to fix the form of settlement in the contract that corresponds to the risk profile.

The main forms in terms of reducing the risk for the exporter:

100% advance payment: Maximum protection for exporters, but rarely applicable in a competitive environment. Full or partial advance is justified with unique equipment, customized production or high country risk.

Letter of Credit (L/C) is the most balanced instrument. An irrevocable, first-class bank-confirmed letter of credit minimizes the risk of non-payment. Payment is made against properly executed documents, regardless of the financial condition of the buyer. Critical: choose an issuing bank with an acceptable rating, obtain confirmation from a bank in its or neutral jurisdiction and perfectly comply with the documentary conditions.

Demand Guarantee provides payment in case of breach of payment obligations by the buyer. The exporter is entitled to claim the amount directly from the guarantor bank, often through an accelerated procedure. It is used both independently and in conjunction with the deferred payment.

Standby LC performs a similar function to a bank guarantee, but is subject to UCP 600 or ISP98. It is convenient if the counterparty is from the United States or countries where bank guarantees are less common.

Documentary collection is a less secure but cheaper alternative to a letter of credit. The bank acts only as a transfer link, without assuming the obligation to pay. The risk of non-payment after shipment remains with the exporter.

Open Account: The maximum risk to the exporter. The goods are shipped, the documents are transferred directly to the buyer, and payment is made later. Justified only in long-term trust relationships, coverage (insurance, factoring) or in a rigid contractual design with interim measures.

Step 2. Check the counterparty and its bank

Before signing a contract and choosing a settlement form, you need to understand who exactly you are dealing with.

What we need to find out:

• legal status of the buyer and its beneficiaries;
• financial statements and credit history;
• reputation in the market;
• the presence of litigation or arbitration proceedings;
• related companies and end decision centers;
• Bank serving the buyer: its rating, jurisdiction, correspondent network, sanctions status.

A flawless letter of credit opened by a weak bank in an unstable jurisdiction is not worth the paper it is printed on. Confirmation from a strong international bank is often the best investment in security.

Step 3. Implementing payment guarantee tools

A letter of credit or guarantee is not enough. The tool must be properly built into the transaction:

• The duration of the credit or guarantee shall cover the period of shipment, delivery, acceptance and possible delays;
• The terms of payment are formulated as clearly as possible, without the possibility of ambiguous interpretation.
• the documents against which payment is made must be under the control of the exporter;
• The right to payment should not be made dependent on the buyer’s actions (for example, on signing the acceptance certificate without the participation of an independent surveyor);
• The contract specifies in detail what discrepancies in the documents will be considered insignificant and do not give the bank the right to refuse payment.

Step 4. Use insurance and non-recourse financing instruments

Transferring the risk of non-payment to a third party is one of the most reliable ways to protect yourself.

Export credit insurance covers commercial (insolvency, prolonged delay) and political (war, currency restrictions, expropriation) risks. Allows the exporter not only to protect receivables, but also to receive financing for insured revenue.

Factoring and Forfeiting without the right of recourse Exporter cedes the monetary claim to the factor or forfeiter, receiving payment immediately after shipment. In a non-recourse scheme, the risk of non-payment is transferred entirely to the financial agent. Especially effective when working with long-term deferral of payment and the supply of investment goods.

Step 5. Prescribe contractual protection mechanisms

The settlement instrument only works in conjunction with a strong contract. The exporter shall include the following provisions in the contract:

• Retention of Title – the goods remain in the ownership of the exporter until full payment. The mechanism must be valid in the buyer’s country.
• Suspension Right – if a payment is delayed, the exporter has the right to stop shipments under all existing contracts with this buyer.
• Acceleration Clause – the entire amount of debt becomes urgent to repay if the payment schedule is violated.
• Penalty and interest – a fixed penalty for late payment or a floating rate (e.g. LIBOR + margin) compensates for the cost of diversion of working capital.
• Sanctions Clause – the exporter’s right to immediately terminate performance and/or demand early refund of financing without liability if the continuation of the transaction violates the applicable sanctions regimes.

Step 6. Comply with currency controls and sanctions

International settlements of the exporter from the jurisdiction of Russia & CIS are under scrutiny of regulators. Failure to comply with the rules entails not only fines, but also the inability to receive payment.

Key points:

• the statement of the contract for registration in the authorized bank within the established time limits;
• Correct registration of the transaction passport (unique contract number);
• compliance with the terms of repatriation of foreign currency earnings;
• Documentary confirmation of supporting documents;
• Screening all parties, banks, carriers and end recipients for sanctions restrictions;
• exclusion from the payment route of the subsanctioned correspondent banks.

An error on this floor blocks the entire payment chain, even if the buyer has transferred the money in good faith.

Step 7. Establish a Documentary Control System

When using letters of credit, collection and bank guarantees, the fate of payment is decided at the level of documents. The protection of the exporter is an impeccable document flow.

Internal regulations for verification should be introduced:

• compliance of documents with the terms of the letter of credit / guarantee (literal compliance);
• No contradictions between the documents;
• compliance with the deadlines for submission;
• Correctness of registration of transport, insurance and commercial documents.

Best global practice: before shipment, send draft documents to the bank that confirmed the letter of credit for preliminary inspection (pre-check). It is worth the time, but eliminates the risk of formal denial of payment.

Step 8. Develop a rapid response strategy for delays

Any late payment should not include an accounting reminder, but a pre-prepared legal scenario.

Algorithm of action:

1. Day 1: formal notice of delay, indicating the amount of principal and accrued interest / penalty.
2. Day 7: contact the guarantor or the bank on a standby letter of credit (if applicable); Start of the internal insurance notification procedure.
3. Day 14: legal claim with a warning about the suspension of shipments, the beginning of arbitration and foreclosure on assets.
4. Parallel to: asset tracing of the buyer and assessing the prospects for interim measures.

The goal is not to punish, but to create the inevitability of consequences and to preserve assets until the settlement.

Step 9. Consider international remedies

If the pre-trial settlement has failed, the exporter must be prepared to dispute.

Effective protection includes:

• International arbitration (ICC, LCIA, SIAC, SCC, ad hoc) – the reservation must be in the contract;
• obtaining interim measures: seizure of assets, freezing injunction, prohibition of alienation of property;
• parallel negotiation of a settlement agreement with a debt repayment schedule.

It is important to assess in advance where the buyer’s assets are located and where the arbitral award can actually be enforced. A recovery strategy is part of a defense strategy, not the final chord.

Comparison of the main forms of calculation for the exporter

How to strengthen your position before a dispute arises

The best protection of the exporter is laid at the stage of structuring the transaction.

In the international contract of sale (delivery), it is desirable to include:

• clearly described mechanism of settlements (letter of credit, guarantee, collection procedure);
• the rating and jurisdiction requirement of the issuing bank/guarantor;
• condition for confirmation of the letter of credit by a first-class bank;
• reservation on the preservation of the right of ownership (taking into account local law);
• the right to suspend performance and to accelerate debt;
• (a) the penalty and the interest for delay;
• the right to unilaterally terminate in case of a material breach;
• arbitration clause in a neutral jurisdiction with an enforceable mechanism;
• sanctions and currency clauses.

The contract should not be written for a situation of “all is well”, but for a situation of “payment is delayed, the buyer’s bank is under sanctions, the country imposes restrictions on the movement of capital”.

Typical mistakes of the exporter in the organization of calculations

1. Consent to an open account without security Without insurance or guarantee is an unconscious lending to a buyer with a high risk of non-refund.
2. Unconfirmed letter of credit from a weak bank In case of problems with the issuing bank, the exporter remains without payment and without goods.
3. Ignoring documentary discrepancies The bank’s friendly attitude does not guarantee payment. The slightest inconsistency gives you the right to refuse.
4. Payment can be blocked by a correspondent bank, even if the exporter and buyer are clean from the point of view of sanctions.
5. Late submission of documents to the bank leads to fines and the risk of administrative, and in some cases criminal prosecution in the CIS jurisdictions.
6. Without a valid title clause, the exporter is simply an unsecured creditor in the bankruptcy of the buyer.
7. The international contract should take into account the law of a particular country, the features of Incoterms and the specifics of the product.

Checklist of exporter

Before signing an international contract and organizing settlements, 15 questions must be answered:

1. What is the level of commercial and country risk in the transaction?
2. Who is the ultimate beneficiary of the buyer?
3. What is the reputation and rating of the buyer’s bank?
4. What form of calculation did I choose and why does it fit the risk profile?
5. Is the letter of credit/guarantee certified by a first-class bank?
6. Are receivables insured against commercial and political risks?
7. Is there a clause in the contract to retain ownership until full payment?
8. Does local law effectively enforce this reservation?
9. What are the terms of repatriation of revenues and foreign exchange control requirements?
10. Have all parties, banks and transport companies been compliant?
11. Who prepares the documents for the letter of credit/incasso and is there a procedure for their preliminary verification?
12. Is there a procedure for the actions and accrual of sanctions in case of late payment?
13. In which jurisdiction will the disputes be considered and how effectively will the decision be enforced?
14. Do I have a plan B in case of a financial crisis?
15. Is the contract sufficient to allow me to safely suspend delivery without breaching my obligations?

What a strong export protection strategy looks like

A strong strategy usually includes five levels:

1. Contractual Shield: A legally verified contract with the correct form of settlement, guarantees, security clauses and prescribed consequences of the violation.

2. Payment Security: Revocable and confirmed instruments (L/C, warranty, standby LC) or insurance coverage and non-recourse factoring.

3. Documentary Discipline: Impeccable document management that excludes formal grounds for refusal of payment.

4. Monitoring & Early Warning – Constant monitoring of the financial condition of the buyer, his bank, changes in legislation and sanctions lists.

5. Rapid Response: A prepared scenario on the first day of delay, including legal pressure, appeal to guarantors and interim measures.

Without the fifth level, the first four may not save you money.

FAQ

What is the safest form of payment for the exporter? 100% prepayment. If it is not available, an irrevocable documentary letter of credit, certified by a top-notch international bank, is the gold standard of protection.

What to do if the buyer refuses the letter of credit and requires an open account?Value the possibility of export credit insurance or factoring without recourse. If the risk is unacceptable, insist on a partial advance and a bank guarantee for the remaining amount or refuse the transaction.

Can you protect yourself from foreign exchange restrictions in the buyer’s country? A properly structured transaction, through a confirmed letter of credit or guarantee from a first-class bank located outside the buyer’s jurisdiction, removes payment from the direct influence of local restrictions. Political risk insurance is also available.

It allows you to claim the goods in kind in case of non-payment or to claim priority satisfaction of claims in case of bankruptcy of the buyer, if such a right is recognized by local legislation. However, its effectiveness depends heavily on the jurisdiction of the buyer.

What to do if the issuing bank of the letter of credit is sanctioned after opening?Immediately stop shipments and require the buyer to provide a replacement in the form of an acceptable instrument from another bank. The treaty should provide for such a right.

Not always, but for regular deliveries with deferred payment, this is one of the most civilized ways to protect the balance of the company and attract financing.

How does protection of exporters and exchange controls in the CIS countries work? The contract should be drawn up in such a way as to ensure both unconditional receipt of foreign currency earnings and compliance with all regulatory terms and procedures. This is a solvable task with the participation of specialists in currency regulation.

Related services

• International Commercial Arbitration and Settlement of Commercial Disputes
• International trade, distribution and cross-border transactions
• Structuring of export contracts and documentary operations
• Sanctions Compliance and Export Control
• Currency regulation and control in the CIS countries
• Export credit insurance and trade finance

Related material

• How to choose an arbitration clause for an international supply contract
• International Letter of Credit: Practical Guide for the Exporter
• Bank Guarantee vs Standby Letter of Credit: pick
• Currency control in the CIS: How to avoid fines and block payments
• Sanctions and international settlements: Compliance Strategy for the Exporter
• Incoterms and the time of transfer of ownership in different jurisdictions
• How to check a foreign buyer and his bank
• Factoring and Forfeiting for an Exporter without Regression

Conclusion

Protecting the interests of the exporter in international settlements requires not a short-term reaction to non-payment, but a proactive security system from the very beginning of the transaction.

A strong position is based on the choice of the form of settlements, adequate risk, the introduction of irrevocable and confirmed payment instruments, impeccable documentary control, insurance and contractual mechanisms for retaining leverage.

In international trade, the winner is not the one who can sue for debts, but the one who initially structured the deal so as not to be in the role of a beggar for his own money.