Exporting can provide a significant boost to your bottom line—but only if you get paid. So while determining whether exporting is right for your company and understanding the key factors in exporting success are vital, making sure you collect what you’re owed is just as important.
Here are four ways to ensure you don’t develop a long list of outstanding payments.
Your best chance to influence payment actually comes long before you issue an invoice. Negotiate payment terms alongside final price. Most customers would prefer to pay 100% of what they owe some time after they have received the goods, while you’d rather be paid in full before you even ship. Your objective and the customer’s are diametrically opposed—not a good basis for negotiation. But if you’re willing to show some flexibility in pricing or delivery, you can often extract favorable payment terms in exchange.
In my international trade consulting practice I usually recommend adding a requirement for a deposit payment shortly after the order. This not only helps your cash flow, it also commits the customer to working with you and makes it much less likely he will cancel the order. Some customers will insist that your bank provide a Letter of Guarantee which will allow them to recover their deposit if you do not ship. These are expensive, so avoid having to provide one if possible.
Trust, but verify
Occasionally a customer will agree to wire the balance of payment prior to delivery, but most customers will not show that degree of trust, just like you don’t trust them with open credit terms.
A Letter of Credit (L/C) is a very common solution to this issue of mistrust. An L/C is in essence an agreement between your bank and the customer’s bank stating that the customer bank will send payment to your bank once you present proof that you have shipped. With an L/C in place you can expect to receive payment within about three to four weeks following shipment. An L/C greatly reduces your risk of not receiving payment, but at some financial expense—typically around 0.5% to 1% of the payment to be made.
Make sure that you review a draft before the final L/C is issued, and must pay attention to every detail if you want payment to be processed quickly. Discrepancies—even trivial matters such as spelling mistakes—can lead to payment delays or non-payment.
Sometimes the customer will insist that the L/C cover all but the final 10– 15% of a payment, which they will promise to pay upon final acceptance. You can either accept this risk or write the L/C so that final payment is triggered by presentation of a final acceptance certificate. This will decrease your risk somewhat since this certificate may be signed by your direct customer, with whom you should have some working relationship and therefore some influence.
In emerging markets a Letter of Credit is a common and accepted payment method for overseas suppliers and while there are administrative costs and banking fees to absorb, at least your risk of non-payment is low.
What about doing business in Europe or Japan? Just like in Canada, customers in these markets expect to be offered open credit terms and purchasing departments expect to dictate payment terms rather than negotiate.
In situations like this you can accept or you mitigate the risk. Export Development Canada (EDC) offers Canadian companies several trade financing options that can be used to decrease your non-payment risk. Though EDC you can purchase accounts receivable insurance, where if the customer doesn’t pay EDC will cover all of most of the bad debt. Euler Hermes also offers trade receivable insurance. Both EDC and Euler Hermes have multiple trade finance programs in place and in recent years have become more flexible and easier to work with.
When nothing else works
Sometimes things just go wrong—the customer can’t pay due to financial issues, or won’t pay due to some dissatisfaction with the product or service you’ve delivered. Do everything possible to address the non-payment issue in order to receive at least partial payment. I would much rather have 90% in the bank than sue for 100%. Suing a customer in China or India can be a time consuming, expensive and frustrating task. If your product has a warranty or on-going service component, that will give you some leverage you can use to extract payment.
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By paying careful attention to payment terms, you can drastically reduce your non-payment risk from overseas customers — my company had a better payment record from overseas customers than from North American ones.
Corey Miller is the principal at Definitive Growth Strategies, a consulting firm that helps transition North American B2B manufacturing companies into global competitors. Prior to that he ran a successful high tech company in the auto industry for over 20 years. He can be contacted here.
MORE PAYMENT PROBLEMS:
- Why You Should Care About Europe’s New Payments System »
- How to Get Foreign Buyers to Pay Up »
- 7 Proven Ways to Get Paid »
- One Way to Trade (and Get Paid) Faster »
- How to Get Paid On Time »
Have you ever had a problem securing payments from an overseas customer? Share your AR strategies and experiences using the comments section below.