More than 300,000 small and medium-sized U.S. companies are growing by exporting products to foreign buyers. When deciding to export, business owners consider several things including: does exporting align with the company’s growth strategy; do we understand what it takes to export profitably; and maybe most importantly, how do I get paid?
As with all sales, being paid in full and on time is key to exporting successfully, and like most negotiations between companies, financial transactions are influenced by local customs, cultural norms and common practices. Asking buyers for cash in advance, for example, is not as common in most of the world as it is in the United States. Offering credit terms to foreign buyer’s increases risk, but the upside may be a more competitive position in the market, and greater growth in revenue. And products like export credit insurance mitigate that risk.
For export sales, three common methods of payment, listed in order from most secure for the exporter to least secure, are:
• Cash in advance
• Letters of credit
• Open account
Cash in Advance
On the surface, cash in advance may seem ideal for the exporter. It eliminates collection problems and wire transfers make payment almost immediate. For the buyer, however, cash in advance increases risk and may create cash flow problems. Exporters who insist on advance payment may lose out to competitors who offer more flexible payment terms.
Letter of Credit
Versatile and secure, a letter of credit is a commitment on behalf of the foreign buyer that the exporter will be paid when the terms and conditions stated in the letter of credit have been met, as evidenced by the presentation of specified documents. The more secure letters of credit are irrevocable, meaning that it cannot be changed without the agreement of both parties.
Open accounts are advantageous for the importer and can be a viable method of payment for foreign buyers who are well established, have a proven track record of favorable payment or have been thoroughly checked for credit worthiness. Open accounts are often used in highly competitive markets, particularly if there is strong competition from local suppliers.
Reduce Your Risk!
The risk of non-payment, for example, can be mitigated by trade finance products like export credit insurance offered by commercial lenders and the Export-Import Bank of the United States (EXIM Bank).
If your company exports product to foreign buyers, what payment method works best for you?
John Privette holds a M.S. degree in business with a specialization in marketing strategy. His work experience includes corporate international marketing, offshore operations management and small business ownership. John specializes in international trade and marketing plan development for the Wyoming SBDC. If you have any questions about international markets, contact John via email at firstname.lastname@example.org.