Chasing opportunities offshore is very tempting for the enthusiastic entrepreneur – but don’t let not getting paid for your efforts a speed hump to growth. Here are some payment pointers…
Safety tips to protect exporters
I have recently returned from a business trip to China and east Asia, and to say it was an eye opener would be an understatement!
Selling to clients in the same state, country, time zone and in the same language is hard enough. But exporting to foreign countries adds a whole new level of complexity to the mix such as currency fluctuation, shipping delays and non-payment. In fact, non-payment is one of the biggest fears for exporters.
Unfortunately for exporters, recent changes in world trade conditions have made managing cash flows more difficult. Increased competition between suppliers has meant that overseas buyers are now regularly able to demand, and obtain, “open account terms”. These terms mean that shipments are paid for only when they arrive at the buyer’s location – with no reliable guarantee of end payment.
So what payment options can you use to safeguard your exports and still remain competitive?
The easiest and cheapest way is to request payment in advance by a wire transfer from the buyer’s bank. You might ask for 50% of the payment when the order is placed and 50% before you ship the merchandise. However, as I mentioned above, this form of payment is becoming less in favour with buyers, as more exporters are willing to offer open account terms to clinch the sale.
Letter of credit
Your second alternative is letter of credit from the buyer’s bank. A letter of credit is essentially an escrow document where the overseas buyer puts the money in his bank, which doesn’t release it until you show proof of shipment in the form of an airway bill or bill of lading. For extra security, consider spending a little more for a confirmed letter of credit. That means your bank will guarantee that the buyer’s bank will make payment.
Export debtor finance
Another popular alternative is export debtor finance (also known as export factoring). How this works is that your overseas customer is approved for “credit” by your chosen bank. When your business ships its goods, you simply provide copies of the purchase order, invoice and bill of lading to your bank, which gives you 80% of the invoice value within 24 hours. The beauty of export debtor finance is that it also secures you against non-payment and credit checks are conducted to ensure your buyers are able to pay.
Another safe payment option is to pay by credit card, if the purchase is within your buyer’s limits. MasterCard and Visa are very commonly used for smaller international transactions.
Other financing tips worth mentioning
- Don’t accept a money order as payment as it’s too easy for scam artists to buy an international money order with a bad cheque.
- Don’t accept a letter of credit that is delivered via mail. This is another common scam. A real letter of credit has to come through the buyer’s bank to your bank.
- Only work with a bank that has a trade financing or international department.
- Credit checks are critical – as is credit insurance. As I mentioned above, some banks offer this service as part of their financing package.
- Be clear on the terms of the transaction – such as the date by which you will ship the goods, the ports through which you’ll be shipping etc. Make sure you meet those terms because even a small delay or change could give the buyer a legal justification not to pay you.
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Finance expert Rob Lamers is a senior manager at cash flow finance specialist Oxford Funding (a division of Bendigo Bank) and works with companies to put in place better cash flow strategies to grow their business. Over the years Rob has also worked in corporate finance roles with the major banks.