Getting paid when trading in the domestic market can be difficult enough at times. At least if payment is delayed, the debtor company is usually reasonably easy to contact – being in the same country and on the same time zone. In the worst scenario, you can often visit your debtor.
That scenario isn’t usually the case when trading internationally. How you’re going to ensure you get paid is important to work out with your trading partner.
There’s no point expending cash, time and labour fulfilling and shipping an order if you’re not going to get paid because you agreed payment terms based on a wing and a prayer. It can also be very disruptive to the business if the payment is delayed for weeks or months, possibly seriously impairing cash flow.
- The type of payment method you use can depend on factors like:
- The country you’re exporting to: In Western Europe or West Africa?
- The nature of the industry can give an indication of lower risk but it’s still not guaranteed: The pharmaceuticals sector is normally perceived as being robust
- The nature of the customer:.Small domestic company, government institution or a well-known global organisation.
- Trading history and status of trust with the customer.
If you can, ask other non-competitive suppliers who already sell to this buyer about their trading experiences. Use business credit information services like Dun and Bradstreet for trading information about the buying organisation.
When selling to overseas regions and customers where risks of not getting paid are higher, there are internationally-accepted payment instruments available via the banking system to provide protection to both buyer and seller.
Let Laurence Bacon of Dublin-based Export Bureaux – a recognised expert in international payment methods – tell you something about them:
The payment methods in order of preference for the exporter are:
2. Letter of Credit
3. Documentary Collection
4. Open Account
Prepayment is straightforward, and rarely used, but is the most favoured option from the exporter’s viewpoint. The knee jerk reaction of most importers is to refuse prepayment, but there are circumstances when it makes sense to use it. Examples include low value payments, discounts for prepayments, low bank charges relative to the sum involved etc.
The next most straightforward method is Open Account. This is typically used in the “Western World” where access to credit information is readily available.
There are risks associated with open account, but these are widely known, and insurance cover can usually be obtained against such risks. Nonetheless, this is the least favourable option from the exporter’s viewpoint for a number of reasons, such as :
1. To operate this method successfully, the exporter needs up-to-date information on the credit standing of the importer, not only at the outset, but every time he intends to make a new shipment.
2. Similarly, the exporter must keep a close eye on each importers record of payments to determine if there is a trend towards late payment. If this is so, there may be a case for a review of payment terms.
3. Most Open Account payment terms include a credit term, usually determined in blocks of 30 days, e.g. 30 days, 60 days etc.
It is an unfortunate aspect of human nature that anyone who is offered 30 days credit will define it differently from the person offering it. In this case, the exporter has agreed terms which literally means that payment will be received within 30 days AT THE LATEST.
On the contrary, the importer is likely to view it as a minimum of 30 days credit, plus whatever extra can be squeezed out of it. This can play havoc with trying to place a realistic costing on losses due to late payments. Some companies do not even track this as a cost and end perplexed when trying to rectify losses over a long period.
The remaining methods of payment (Letters of Credit and Documentary Collections) are commonly used in international trade, especially outside of the EU and some pointers may prove useful, to help to understand which one is appropriate to given circumstances.
Bear in mind that all LCs bear a conditional guarantee of payment from at least one bank, but no such guarantee applies to Documentary Collections. However, the exporter must employ a high level of expertise to ensure compliance with the LC and the rules governing it.
Some pointers for exporters to consider when deciding between LC and Documentary Collection:
Take the Letters of Credit route if:
- Country Risk
- New customer
- High value shipment/s
- Contract does not call for marine insurance
- Seasonal business
- Custom-made products
- Language difficulties between buyer & seller
- Can be used to improve cash-flow
Take the Documentary Collection route if:
- Availability of good credit information
- Regular customer previously on LC terms
- Low value shipment/s
- Goods insured
- Steady year-round demand for the product
- Commodities in demand by competing buyers
- No language or culture difficulties
- Use where cash-flow at risk is not a problem”
Ensuring that you get paid for your orders is one of the most important factors to get right in establishing an international marketing presence. To help the SME exporter, there is a raft of established payment instruments available for the risk management of international trade.
Stuart Allcock – Owner of Applied Business Support