How manufacturers can manage payment risk on export invoices

Exporting manufactured goods from the UK can be a fantastic route to growth, opening up vast new markets. However, getting paid by overseas customers introduces a unique set of financial risks that domestic trade simply doesn't have. From currency fluctuations eroding your profit margins to navigating different legal systems when a payment is late, managing export invoices requires a specific and robust strategy. This guide breaks down the three core payment risks for UK manufacturers—currency exposure, longer payment terms, and cross-border collection—and provides practical steps to manage them.

Understanding and Managing Currency Exposure (FX Risk)

Foreign exchange (FX) risk is the danger that the value of your invoice in pounds sterling (GBP) will decrease between the time you issue it and the time your client pays. If you're invoicing in a foreign currency, like US Dollars or Euros, and the pound strengthens against that currency before payment arrives, you will receive less money than you originally billed for.

To Invoice in GBP or Foreign Currency?

You have two primary choices when invoicing an international client, each with its own trade-offs.

• Invoicing in Pounds Sterling (GBP): This is the simplest and safest option for you as the exporter. You state the price in GBP, and the customer is responsible for converting their local currency to pay the exact GBP amount. This completely transfers the FX risk to your buyer. The downside is that it can be less attractive to the customer. They face uncertainty about the final cost in their own currency, and some may even delay payment, hoping for a more favourable exchange rate.

• Invoicing in the Customer's Local Currency (e.g., EUR, USD): This is often seen as more customer-friendly and can be a competitive advantage. The buyer knows exactly how much they need to pay in their own currency. However, this means you, the UK manufacturer, shoulder all the FX risk. If the pound strengthens against their currency after you've sent the invoice, the payment you receive will be worth less in GBP than you anticipated, directly hitting your profit margin.

How to Mitigate FX Risk When Invoicing in a Foreign Currency

If you decide the commercial benefits of invoicing in a local currency outweigh the risks, you are not powerless. You can use several financial tools to protect your business.

• Forward Exchange Contracts (FECs): This is the most common method for SMEs. An FEC allows you to lock in an exchange rate with a bank or FX broker for a future date. For example, if you issue a $50,000 invoice on 90-day terms, you can arrange an FEC to sell $50,000 for a guaranteed amount of GBP in 90 days. This removes all uncertainty. You'll know exactly how much sterling you will receive, regardless of what the live exchange rate does in the meantime.

• Foreign Currency Bank Accounts: If you have regular sales and some costs in a particular currency (e.g., you sell to the US and also buy components from a US supplier), it can make sense to open a US Dollar bank account. You can receive payments in USD and use those funds to pay your USD suppliers, avoiding currency conversion fees and risk altogether. You can then choose to convert the remaining balance to GBP when the exchange rate is favourable.

• Currency Options: A currency option gives you the right, but not the obligation, to exchange a specific amount of currency at a set rate on a future date. This is more flexible than an FEC—if the exchange rate moves in your favour, you can let the option expire and trade at the better spot rate. However, you have to pay a premium to buy the option, and they are generally more complex and better suited to larger businesses with dedicated finance teams.

• Build a Buffer into Your Pricing: For smaller, less frequent exports, you might simply add a small percentage (e.g., 2-3%) to your price to create a buffer against minor adverse currency movements. Be transparent about this if asked, but it can be a simple way to provide some protection without the administration of formal hedging products.

Tackling Longer Payment Terms and Working Capital Strain

While typical UK domestic payment terms are 30 days, it's common for export invoices to have terms of 60, 90, or even 120 days. This is often due to longer shipping times, customs clearance delays, and different commercial norms in the buyer's country.

This delay can place an immense strain on your working capital. You have to fund raw materials, labour, and overheads months before any cash comes in from the sale, tying up money that could be used to fund the next production run.

Strategies to Improve Export Cash Flow

• Request Upfront and Staged Payments: This is one of the most effective ways to de-risk an export order. Instead of offering 100% credit, structure the payment. A common approach for manufactured goods is:

  • 30-50% upfront with the purchase order, before production begins. This covers your initial material costs.
  • 30-40% upon shipment, payable when you provide the bill of lading (proof of shipment).
  • The final 10-30% balance 30 or 60 days after delivery. This structure ensures you are not funding the entire project out of your own pocket and demonstrates the buyer's commitment.

• Use Trade and Invoice Finance: Specialist lenders can advance you cash against the value of your export invoices, bridging the gap between shipping the goods and getting paid.

  • Export Factoring: You sell your export invoices to a finance company (a "factor"). They might advance you up to 90% of the invoice value immediately. The factor then takes on the responsibility of collecting the payment from your overseas customer. In a "non-recourse" agreement, the factor also takes on the risk of the customer not paying. This is more expensive but provides excellent protection.
  • Invoice Discounting: This is a confidential facility where you borrow money against your export sales ledger. You remain in control of your own credit control and customer relationships, which many businesses prefer.

• Use a Letter of Credit (L/C): For large orders or transactions with new clients in high-risk countries, an L/C is the gold standard for payment security. It is a legally binding document from the buyer's bank guaranteeing payment to your bank, provided you meet a specific set of conditions (like providing proof of shipment by a certain date). Confirmed Letters of Credit, where your own bank adds its guarantee, offer the highest level of security. However, L/Cs are administratively complex and have associated bank fees, so they are typically reserved for high-value shipments.

• Get Export Credit Insurance: You can insure your export invoices against non-payment. If your customer fails to pay due to commercial reasons (like insolvency) or political reasons (like war, expropriation, or currency controls in their country), the insurance policy pays out. UK Export Finance (UKEF), the UK's export credit agency, can provide government-backed insurance, often for markets where private insurers won't offer cover.

Overcoming Cross-Border Collection Difficulties

Chasing an overdue invoice from a customer down the road in the UK is one thing; chasing one from a client thousands of miles away in a different time zone, who speaks a different language and operates under a different legal system, is another challenge entirely.

Crucially, the UK's Late Payment of Commercial Debts (Interest) Act 1998, which gives you the statutory right to claim interest and fixed compensation, does not automatically apply to international contracts. Your right to charge interest on a late export payment only exists if you have explicitly included it in your commercial contract.

Best Practices for International Credit Control

1. Start with a Watertight Contract: Your sales contract or terms and conditions document is your first and most important line of defence. It must clearly specify:

   • Governing Law and Jurisdiction: This clause is vital. It should state which country's laws govern the contract and where any legal disputes will be heard. For a UK exporter, you should always push for: "This agreement shall be governed by and construed in accordance with the law of England and Wales, and the parties submit to the exclusive jurisdiction of the courts of England and Wales." Without this, you could find yourself having to navigate a foreign court system.
   • Payment Terms: Be precise. "Net 60" is ambiguous. Is it 60 days from the invoice date, order date, shipment date, or delivery date? Specify it, for example: "Payment due in full within 60 days of the Bill of Lading date."
   • Currency of Payment: State the currency explicitly (e.g., "All payments to be made in GBP").
   • Late Payment Clause: Since the UK statutory rights don't apply, you must add your own contractual clause, such as: "Interest will be charged on all overdue amounts at a rate of 4% per annum above the Bank of England base rate."

2. Conduct Thorough Customer Due Diligence: Before offering credit to a new overseas customer, check their creditworthiness. Don't just rely on a slick website. Use an international credit reporting agency (like Dun & Bradstreet) to get a business report. These reports can provide financial information, details of company directors, and payment history.

3. Systematise Your Chasing Process: Consistency is key. An automated, scheduled approach is far more effective than sporadic, manual emails.

   • Send a polite reminder a week before the due date.
   • Follow up the day it becomes overdue.
   • Escalate your communications every 7-10 days, with the tone becoming progressively firmer. This is where automation tools are invaluable. For example, software like InvoiceReminder can connect to your accounting system (like Xero or QuickBooks) and automatically send out these scheduled email reminders for you. It ensures no overdue invoice is forgotten and maintains a professional and persistent approach without the manual effort, which is especially useful when dealing with different time zones.

4. Use International Debt Collection Agencies: If your own chasing efforts fail after 60-90 days, your next step should not be to sue. It should be to engage a specialist international debt collection agency. They have teams on the ground in the customer's country, speak the local language, and understand the local business culture and legal system. Their fees are typically a percentage of the amount recovered, making them a far more cost-effective option than international litigation.

5. Litigation is the Last Resort: Taking legal action against a company in another country is incredibly expensive, time-consuming, and uncertain. It should only be considered for very large debts where all other options have been exhausted, and even then, only after taking detailed legal advice. Prevention is always better than cure.

A Risk-Based Framework for Export Payments

Not every export order carries the same level of risk. Your payment strategy should be proportionate to the transaction. Here is a simple framework to help you decide on the right approach.

Risk Factor	Low Risk	Medium Risk	High Risk
Customer & Country	Established customer in a stable, developed economy (e.g., Germany, USA).	New customer in a stable economy, OR an established customer in a developing but stable economy.	New customer in a politically or economically volatile country.
Order Value	Small, regular orders.	A significant but not business-critical order.	A very large order that would have a major impact on your cash flow if paid late or not at all.
Suggested Payment Method	Open Account (e.g., Net 30/60 Days). Invoice in GBP or use a simple FX hedge.	Staged Payments (e.g., 30% upfront, 70% on shipment). Consider Export Factoring or Credit Insurance.	Confirmed Letter of Credit (L/C) is strongly recommended. Alternatively, demand 100% payment upfront (less common).
Collection Strategy	Automated reminders, standard contractual terms.	Robust credit checks, strong contractual clauses for law/jurisdiction, consider pre-emptive credit insurance.	Insist on UK jurisdiction in the contract. Use Export Credit Insurance from UKEF or a private insurer. Have a collection agency on standby.

By categorising each export opportunity, you can apply the right level of security and control, protecting your cash flow without creating unnecessary administrative burdens for every single sale.

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Frequently asked questions

What's the best currency to invoice an overseas client in?

There is no single "best" currency. Invoicing in your home currency, pounds sterling (GBP), is safest for you as it eliminates foreign exchange risk. However, invoicing in your client's local currency (e.g., USD, EUR) is more customer-friendly. If you invoice in a foreign currency, it's wise to use a financial product like a Forward Exchange Contract to lock in an exchange rate and protect your profit margin.

Can I charge interest on an overdue export invoice?

You can only charge interest if you have included a specific clause in your sales contract that gives you the right to do so. The UK's Late Payment of Commercial Debts (Interest) Act 1998, which grants a statutory right to interest on B2B invoices, generally does not apply to international transactions unless your contract explicitly states it is governed by UK law.

What is a Letter of Credit and when should I use one?

A Letter of Credit (L/C) is a guarantee from the buyer's bank that payment will be made to you once you meet certain criteria, such as providing proof of shipment. It is a very secure payment method but can be administratively complex and costly. It is best reserved for high-value orders or when dealing with new customers in countries you perceive as high-risk.

How do I credit check a company in another country?

You can use global credit reporting agencies like Dun & Bradstreet (D&B) or Experian International. These firms can provide detailed business credit reports on companies worldwide, including their payment history, financial health, and corporate structure. Your bank or a trade finance provider may also be able to assist in obtaining a report.

Is export credit insurance worth the cost?

For many manufacturers, yes. The premium is typically a small percentage of the invoice value, which is often a small price to pay for protection against the total loss of the invoice amount due to customer insolvency or political events. UK Export Finance (UKEF) can offer government-backed policies, sometimes for markets where private insurance is unavailable. This is general guidance, not a recommendation to purchase a specific product.

Why is the 'governing law' clause so important in my export contract?

This clause determines which country's legal system will be used to settle any disputes. By specifying the law of England and Wales, you ensure that any potential legal action can be handled within a familiar, predictable, and English-speaking legal framework. Without it, you could face the enormous cost and complexity of navigating a foreign court system in a different language.

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Stop chasing, start automating

Managing the complexities of export finance is challenging enough without adding the manual burden of chasing late payments. InvoiceReminder helps UK small businesses, freelancers, and accountants automate their accounts receivable process. By connecting to your Xero, QuickBooks, Sage, or FreeAgent account, it can send scheduled email reminders for overdue invoices according to rules you define, saving you time and helping you get paid faster. The core email reminder features are currently available on a free plan, with no card required to sign up. InvoiceReminder is built by the team behind WeCovr, a UK company authorised and regulated by the Financial Conduct Authority in its capacity arranging over a million insurance policies.