Payment Instruments and Hedging Open-Account Export Risk

All exports involve risk, including foreign exchange, political risks, freight, movement of title and payment.

Focus below is on movement of title and transfer of payment, and is arrayed from the least risk to the seller to the most risk to the seller.

NOTE: Credit insurance can protect most of these transactions, including Unconfirmed letters of credit, drafts and open account transactions

Payment Method	Time of Payment	Transfer of Goods	Risk to Exporter	Risk to Buyer	Notes
Prepayment	Before shipment	After Payment	None	Total	• Possibly not a viable option • Could make exporter less competitive
Irrevocable Letters of Credit • Expensive/time consuming • Must be precisely followed • Must be properly prepared
Confirmed Irrevocable	After shipment/docs presented	After payment	Double assurance	Should be involved prior to shipment	Should be involved prior to shipment
Unconfirmed Irrevocable	After shipment/docs presented	After payment	Issuing bank assurance ONLY	Should be involved prior to shipment	• No protection in the event of issuing bank failure to pay • Can be insured
Standby					• Used as a backup if standard payment arrangements are unfulfilled • Payable on demand • Typically one year term • Little downside
Drafts • No guarantees • Product can be returned • Bank only facilitates
Sight Draft	On presentation to buyer	After payment to buyer’s bank	Goods can be returned if not honored	Should arrange inspection of content prior to payment	• Conditional • Buyer can reject merchandise • Can be insured
Time Draft	At maturity	After acceptance, before payment	Relies on buyer to honor draft	Should arrange inspection of content prior to payment, time allows for adjustments in arrangement, correcting of problems, etc.	• Time risk • Conditional • Should be scheduled/not ballooned • Can be insured
Open account	As agreed, stated on invoice and order	Before payment	Buyer’s creditworthiness, country risk	None	• Ongoing monitoring of credit risk • Should be insured