Sending your product overseas is an exciting time for your business – especially if you can stop worrying about how you’ll get paid. To help you decide which of the payment options to use, we’ve put together this handy guide.
Step 1. Size up your options
The amount and type of credit you extend and your attitude to risk will determine which of the following four options is best for you and your business.
Payment in advance: You receive the whole invoice amount before dispatching any goods. There’s no risk, your cash flow is unaffected and there are no financing costs to bear. If a customer’s credit check is unsatisfactory this is a cast iron way to protect yourself. “However,” says Teresa Baffa, International and Trade Manager at Barclays, “The reality is very few customers will be prepared to pay the total amount in advance – certainly not on an ongoing basis – and you will not be able to compete effectively if this is all you offer.”
Letters of credit: You receive guarantees from a bank that you’ll be paid as long as you meet the terms of the letter – making letters of credit the next safest way to get paid. There are two sorts of letter: confirmed and unconfirmed. A confirmed letter of credit means there are guarantees from your customer’s bank and your own; with an unconfirmed letter the guarantee comes only from your customer’s bank. Barclays can help you understand when to use a letter of credit and can prepare one if you’d like to go down this route. Read more about managing your credit risk.
Documentary collection: Your bank and the customer’s bank act as middlemen in the deal. Here’s how it works. You instruct your bank to draw up a ‘bill of exchange’, which is sent from your bank to your customer’s bank and then on to your customer. Only when the customer accepts the bill (and the payment terms included in it) do they take delivery of the goods. The Barclays Business Abroad package offers you a 25% discount on the preparation of international export documents.
Open account: Similar to offering credit to a UK customer in that you supply the goods and invoice the customer, stating when payment is due. This method has the highest risk of non-payment, and the greatest effect on your cash flow, as you bear all the costs of production and shipping until the invoice is paid. Needless to say the prudent approach here is to use open accounts when you have an established relationship with a customer who has an excellent credit record.
Step 2. Assess country and credit risks
Dealing with new overseas customers doesn’t have to be a leap of faith. Experian publishes credit reports on foreign businesses that’ll give you accurate, up-to-date information to help you decide whether they’re a credit risk. The reports are available to Barclays Business Abroad customers at a 40% discount.
The economic and political situation in your customer’s country will also impact on your attitude to the deal, and therefore which payment terms to use. Have a look at Business Link’s useful country risk assessment tool.
Step 3. Compromise
Given that the most risky payment option for an exporter is the least risky option for an importer, and vice versa, often a compromise has to be found. “Most international trade is carried out with a combination of payment terms,” says Barclays’ Teresa Baffa. “For example, you’ll negotiate a deposit up front with the balance on a letter of credit. But exceptions occur – for example the majority of trade between the UK and the EU is on open account as it’s a very established zone.”
“Remember that international trade is still simply trade – just further away. While it’s true there are extra processes and new ways of doing things to grasp, ensuring you get paid from abroad is actually very straightforward. Thousands of UK companies export their products every day and there are standard procedures to make the payment process as simple and risk-free as possible.”
– Teresa Baffa, International and Trade Business Manager at Barclays”