The first export order is usually a good news story told badly. Somebody finds you online, the enquiry looks serious, the numbers are bigger than your domestic average, and you say yes before you have worked out what saying yes commits you to. Six weeks later you are paying suppliers in sterling for goods that will not be invoiced for another two months and will not be paid for two months after that, to a company you have never met, in a country whose courts you have no intention of ever visiting.
There are two separate problems hiding in that sentence, and small firms routinely solve one and ignore the other. The first is funding: you carry the cost of the order for longer than you would at home. The second is credit risk: if the buyer does not pay, your options for making them pay are considerably worse than they would be down the road. Different tools fix each one, and the UK has a government department whose entire job is helping small firms with both.
The cash gap is longer than you think
Exporting stretches every part of the working capital cycle. Manufacturing or sourcing takes the same time it always did. Then add freight, which for sea can be several weeks. Then customs clearance at the other end. Then the payment terms, which for a first-time overseas buyer are often no better than the ones you offer at home and frequently worse.
Work the whole thing out as one number before you quote. Take the date you first pay out real money — the deposit on materials, not the date of the invoice — and the date the cash lands in your account. That is the gap you have to fund. Then take the largest amount you are out of pocket at any single point in that gap. That is the facility you need, and it is almost always larger than owners expect, because the peak sits before any money has come in at all.
The same arithmetic applies in reverse when you import, and it catches people the same way — paying for stock months before you sell it walks through that side of it.
The payment ladder, safest first
How you get paid is a negotiation, and the positions on it are well established. Ranked from safest for you to riskiest:
Payment in advance. All the money before anything ships. Safest for you, hardest to sell, and normally only achievable on smaller orders or where you have something the buyer badly wants.
Letter of credit. The buyer's bank undertakes to pay you provided you present documents that exactly match the terms of the credit. Getting it confirmed by a UK bank moves the risk from a bank you know nothing about to one you do. Letters of credit are formal, cost money at both ends, and are unforgiving: banks pay against documents, not against goods, so a typo in a bill of lading can hold up payment on a perfectly good shipment.
Documentary collection. Your bank sends the shipping documents to the buyer's bank, which releases them to the buyer only against payment or against acceptance of a bill of exchange. Cheaper than a letter of credit, but no bank is guaranteeing anything — if the buyer refuses the documents, your goods are sitting in a foreign port and you are paying storage.
Open account. You ship, you invoice, you wait. This is what most established trade actually runs on, and it is the position most buyers will push for. It is fine when the buyer is good for it, which is a question you should answer with evidence rather than optimism.
Every step you move down that ladder is a discount you are giving the buyer. Price it, or trade it for something — a deposit, a shorter term, a bigger order.
What UK Export Finance actually offers
UK Export Finance is the government's export credit agency, and its products are delivered through ordinary high street and commercial banks rather than directly. Four things are worth knowing about as a small firm.
The General Export Facility provides a partial guarantee to your bank so it can extend trade finance to you, including loans and letters of credit. The government guarantee covers up to 80% of the lender's exposure, on facilities up to £25 million, and — this is the useful bit for smaller exporters — it is not tied to a specific export contract. It supports general exporting costs: labour, inventory, the working capital that sits underneath multiple orders.
The Export Working Capital Scheme does the same job for a specific contract, pre-shipment and post-shipment, which suits the firm that has just won one large order rather than built an export book.
The Bond Support Scheme matters if a contract requires you to provide a performance bond or advance payment guarantee. Normally your bank will want that bond cash-collateralised, which means the money sits frozen for the length of the contract. UKEF can guarantee up to 80% of the bond's value to your bank, freeing most of that cash back to you as working capital.
The Export Insurance Policy covers the credit risk rather than the funding. It insures you against not being paid for an export contract, or against not recovering the costs of performing it, for events including buyer insolvency and simple failure to pay. Cover runs to up to 95% of losses from the insured events, and there is no minimum or maximum contract value, which is unusual — commercial credit insurers often will not look at a single small contract at all.
UKEF also runs a network of regional Export Finance Managers who give free, impartial consultations. They are not selling you anything and they are not a lender. If you are quoting your first serious overseas contract, an hour with one before you commit to terms is the cheapest thing on this page.
A worked example
These are illustrative figures for a small engineering firm, but the shape is typical.
You win a £180,000 order from a buyer in Canada. Your cost of delivering it is £120,000, of which £70,000 is materials paid to suppliers on 30-day terms starting in month one, and £50,000 is labour spread over four months. Shipping and clearance take five weeks. The buyer wants 60 days from delivery.
Lay the cash out month by month and the picture is stark. You start paying in month one. You ship at the end of month four. The goods clear in month six. Payment is due at the end of month eight. Your peak cash exposure is the full £120,000, and it sits there for roughly four months before any money comes back. On a £60,000 gross margin, you are funding twice your margin for a third of a year.
Now change one term at a time. A 30% advance payment brings £54,000 in at the start and cuts the peak exposure to £66,000. Moving from 60-day to 30-day terms pulls the whole receipt forward a month. An export working capital facility with an 80% UKEF guarantee behind it makes your bank far more willing to lend against an order from a customer it has never heard of, in a country where it cannot easily enforce.
None of those changes the profit on the job. All of them change whether you can afford to take the next one while this one is still unpaid.
Before you quote, not after
Five things to do while you still have negotiating room.
One: credit-check the buyer properly. Overseas company data is patchier than Companies House, so use a credit agency with international coverage, ask for trade references and actually call them, and treat a buyer who will not provide references as having answered your question. The same process you would run on a big domestic order applies, with more effort.
Two: model the cash gap and the peak exposure, in months, before you agree terms.
Three: decide which currency you are invoicing in, and if it is not sterling, decide how you are covering the exchange rate movement between quote and payment. A forward contract fixes the rate; doing nothing is a position, not the absence of one.
Four: get the VAT treatment right from the start rather than unpicking it later — selling abroad has its own rules for goods and services, and they differ.
Five: put your terms in writing, in a contract that says which country's law governs it and where disputes are heard. A UK jurisdiction clause is not a guarantee of payment, but it is the difference between a solicitor's letter and an international problem.
Exporting is not inherently riskier than domestic trade. It is slower, and slow is what kills small firms with thin working capital. Fund the gap deliberately, insure the risk you cannot afford to carry, and the first order stops being a gamble and starts being a market.
Common questions
What is a letter of credit and when should a small exporter use one?
A letter of credit is an undertaking from the buyer's bank to pay you once you present documents that exactly match the terms set out in the credit. It is worth using when the order is large enough to matter, the buyer is new to you, or the country carries payment risk you cannot assess. The important refinement is confirmation: asking a UK bank to add its own undertaking moves the risk from a foreign bank you know nothing about to one you do. The catch is that banks pay against documents rather than goods, so small discrepancies in the paperwork can delay payment on a shipment that is entirely correct.
What does UK Export Finance do for small businesses?
UK Export Finance is the government's export credit agency, and it works through your bank rather than lending to you directly. Its General Export Facility gives your lender a guarantee covering up to 80% of its exposure on trade finance facilities up to £25 million, not tied to a single contract. The Export Working Capital Scheme does the same for a specific export order. The Bond Support Scheme guarantees up to 80% of a performance bond so your bank does not need to freeze the full amount as collateral. The Export Insurance Policy covers up to 95% of losses from insured events such as buyer insolvency or non-payment, with no minimum contract value.
How long does an export order take to get paid compared with a domestic one?
Longer at almost every stage, and the stages compound. Production takes the same time as always, then freight adds days or weeks depending on the mode, then customs clearance at destination adds more, and only after all of that does the payment clock start. A 60-day term agreed with an overseas buyer commonly means five to eight months between first paying a supplier and receiving the cash, against two or three months domestically. Calculate the gap from the date money first leaves your account, not from the invoice date, and identify the single point at which you are most out of pocket.
Should I invoice an overseas customer in sterling or their currency?
Invoicing in sterling removes exchange rate risk from your side entirely and pushes it onto the buyer, which is simplest and often acceptable on smaller orders. Invoicing in the buyer's currency makes you more competitive and is sometimes the price of winning the contract, but it means the sterling value of your invoice moves between quoting and being paid. If you invoice in a foreign currency, cover the exposure deliberately: a forward contract fixes the rate for a future date, and a foreign currency account lets you hold receipts to offset payments in the same currency. Leaving it uncovered is a position you have taken, not a decision you have avoided.
