Lesley Batchelor OBE is an expert on international trade and a passionate champion of UK exporters. She is Director General of the Institute of Export, the professional membership body for everyone involved in international trade.
To win an export contract, an exporter will sometimes be put under pressure to be competitive and offer trade credit terms for an overseas customer, particularly if this is the norm in that country. You may even be advised that your competitors are offering trade credit terms.
So where does this leave you, if you’re only just starting out in international trade? Should you offer credit?
Assess the risk
No matter what the pressure, a business should not just offer credit terms if the circumstances do not merit it, such as:
• The customer (buyer) is a ‘bad’ credit risk
• You have never dealt with the buyer before and haven’t done a credit reference on them
• There are concerns over the country risk
• Where delayed or non-payment would put the whole viability of your business at risk.
When should I do a credit check?
- When dealing with a new customer
- When dealing with a new supplier
- When dealing with a new business associate, especially before providing credit
- When sales orders with a customer increases
When trading internationally, a business must ensure they have a sound view on the credit position of the overseas buyer and get a credit reference. There are several credit reference agencies who have an international presence and are able to provide credit information, although the depth and reliability of this information may vary depending on where the buyer is based.
It may, for example, be easier to obtain credit information on a buyer in Europe or North America, with less information available on a buyer in other parts of the world.
Take whatever opportunities you can to understand how this potential customer has done business before. Perform the same acts of due diligence that you would for a UK based potential client.
What is “country risk”?
Country risk is a little trickier, as this depends on political, economic and various external risks. Moody’s provide country risk data based on a rating system.
Added to this are exchange control regulations that governments can put in place to ban or restrict the amount of foreign currency or local currency that is allowed to be traded or purchased (restricting the amount of currency that can be used for imports and exports).
Countries imposing exchange controls usually have weaker economies and/or subject to political instability. If a country has exchange control regulations in place (or it introduces exchange control) it can take longer before the Central Bank releases the money. Some countries may also introduce exchange controls in times of difficulty. It’s really worth doing your research in this regard.
Open credit accounts
You possibly are already offering credit without even knowing it. If you send the goods to the customer before they have paid, you are effectively providing credit. This is called an “open account” and this is where payment and credit risk often arises.
Do not take unnecessary risks in order to win the business and do not offer open account and credit terms where there is a risk of non-payment.
Are there any alternatives?
You might consider offering an established customer an open account (as mentioned above) with credit insurance. This is how it works:
- Trade credit insurance is taken out on the customer (debtor)
- Covers the risk of non-payment, and late payment
- Allows the seller to offer open account terms, knowing they have the comfort of credit insurance in the event of non-payment
This kind of trade credit arrangement can work quite well in the following circumstances:
- For sales in the UK, and to Europe
- Where there is pressure for open account trading
- For sales to large well-known companies
- Where there are clean invoices – that is to say, with no money held back and no warranty periods
- For contracts up to 90 days.
How to minimise payment and trade credit risk
- Due diligence; get to know your potential customer (meet them if possible)
- Undertake a credit reference check
- Consider Trade references and status enquiries
- If feasible undertake a credit assessment from the customer’s financial accounts (credit referencing potentially however is more valuable)
- Consider Export Credit Insurance
- Request Bills of Exchange be protested for non-payment under a Documentary Collection
- If applicable the schemes provided by UK Export Finance may support exporters (such as the Export Credit Insurance scheme).
- Before giving credit to new customers assess their creditworthiness through an application process.
- Minimise the risks of late payment from new customers by initially granting a low credit limit. Take into account that this may restrict your sales growth.
- Credit payment terms vary across the world. Bear in mind that non-UK firms often expect a large discount for early settlement.
- Trade finance solutions can plug the cash flow shortfall while you await payment but carefully consider the risks of this. If your customer does not pay, can you afford to shoulder the burden of non-payment?
You might also want to listen to our webinar on how to get paid on time and in full for more expert advice.