In import-export, managing payments effectively is critical for cash flow, profitability, and long-term business stability. SMEs often face challenges such as:

• Delayed payments from international buyers

• Currency fluctuations that reduce profit margins

• Miscommunication over payment terms

• Losses due to incorrect transaction mechanisms

Understanding payment modes, currency risk, and hedging strategies ensures that SMEs receive payments on time and protect profits.

Table of Contents

1. Common Payment Methods in IMPEX

2. Understanding Currency Risk

3. Strategies to Manage Forex Risk

4. Working with Banks & Payment Partners

5. Government Support & Schemes

Common Payment Methods in IMPEX

1. Advance Payment

   • Buyer pays in full or part before shipment

   • Pros: Reduces seller’s risk

   • Cons: May be unattractive for buyers

2. Letter of Credit (LC)

   • Bank guarantees payment on fulfillment of documents

   • Pros: Secure, widely accepted

   • Cons: Bank charges, documentation requirements

3. Documents Against Payment (DP / D/P)

   • Buyer pays upon receiving shipping documents

   • Pros: Lower bank charges than LC

   • Cons: Risk if buyer delays or refuses payment

4. Documents Against Acceptance (DA / D/A)

   • Buyer accepts a bill of exchange, pays at maturity

   • Pros: Can facilitate longer credit

   • Cons: Risk if buyer defaults

5. Open Account / Direct Transfer

   • Payment made after shipment directly to seller’s account

   • Pros: Simple and cost-effective

   • Cons: High risk; suitable only for trusted buyers

Actionable Tip: Choose payment mode based on trust, transaction size, and risk tolerance.

Understanding Currency Risk

1. Forex Risk Explained

   • When payments are in foreign currency, exchange rate fluctuations can impact profits

2. Types of Forex Risk

   • Transaction Risk: Changes in exchange rates between invoice date and payment receipt

   • Translation Risk: Affecting consolidated financial statements if business uses multiple currencies

   • Economic Risk: Long-term impact on competitiveness due to currency volatility

3. High-Risk Scenarios

   • Exporter invoices in USD but receives payment months later

   • Importer pays in EUR, and INR strengthens in the interim

Actionable Tip: Always calculate potential forex loss scenarios before fixing prices.

Strategies to Manage Forex Risk

1. Forward Contracts

   • Bank or financial institution locks in exchange rate for future payment

   • Pros: Eliminates currency volatility risk

2. Currency Options

   • Right (not obligation) to buy/sell foreign currency at predetermined rate

   • Pros: Flexibility to benefit if currency moves favorably

3. Invoice in Home Currency (INR)

   • Transfer risk to buyer

   • Suitable when buyers accept INR terms

4. Natural Hedging

   • Match foreign currency receivables with payables in same currency

   • Example: Exporter exporting to USD and importing USD raw materials

Actionable Exercise: Evaluate your top 3 export/import currencies and select the most appropriate hedging strategy.

Working with Banks & Payment Partners

1. Choosing the Right Bank

   • Experienced in international trade services

   • Offers competitive forex rates, LC handling, and advisory

2. Bank Services for SMEs

   • Letters of Credit

   • Export/Import financing (Packing Credit, Post-Shipment Credit)

   • Forex risk management tools

   • Online tracking of remittances

3. Documentation for Payments

   • Invoice, shipping documents, LC, packing list, insurance certificate

Actionable Tip: Maintain a bank liaison contact to expedite payments and resolve disputes.

Government Support & Schemes

1. Export Credit Guarantee Corporation (ECGC)

   • Provides insurance against non-payment by overseas buyers

2. Packing Credit & Pre/Post Shipment Finance

   • Working capital finance to bridge cash flow gaps

3. Duty Drawback & Incentives

   • Proper accounting ensures maximum benefit while complying with GST and foreign trade rules

SMEs should integrate financial planning, government incentives, and banking support for smoother transactions.

SME Case Example

Scenario: SME exporting organic spices to USA and UAE

• Payment Method: LC for USA, D/P for UAE

• Currency Risk: USD and AED exposure

• Risk Mitigation:

  • Forward contract to lock USD-INR rate

  • Natural hedge by sourcing packaging materials from UAE suppliers in AED

  • Insurance via ECGC for LC payment default

• Outcome:

  • Secured full payment without currency loss

  • Improved cash flow for repeat shipments

  • Reduced administrative overhead

Key takeaway: Using appropriate payment modes, hedging, and bank support safeguards profits and ensures timely payment.

Actionable SME Checklist

1. Decide payment method per buyer & transaction size

2. Identify currency exposure and potential risk

3. Choose hedging strategy (forward contract, options, natural hedge)

4. Liaise with bank for LC, financing, and documentation

5. Ensure insurance coverage via ECGC or cargo insurance

6. Maintain payment tracker and forex monitoring log

SMEs that follow this checklist can protect their profits, improve cash flow, and confidently scale international operations.

With payments and currency risk managed, the next step is to learn from mistakes other SMEs make and avoid common pitfalls:

Read: Common Mistakes Importers & Exporters Make