Getting Paid Part 1 - Agreeing the Right Payment Terms

April 2017  Getting Paid Part 1 - Agreeing the Right Payment Terms

 

 

In this article and the following one, I am looking at the importance of managing payments on international transactions.

This crucial issue is one that new exporters need to consider from the start of their export plans. Terms of payment should always be discussed at the start with all customers, distributors and re-sellers.

Exporting carries greater risks than home trade for both buyer and seller, and one of the key risks for the exporter is of not getting paid or incurring serious delays in payment. For the importer, the risk is in not receiving the goods or receiving unsatisfactory products. This of course, is the same for transactions with a customer in our own country, but the distance, and in particular the crossing of borders, makes the risk greater for both parties. A further issue to consider is the risk of currency fluctuations, which has been a particular issue in recent years as even supposedly stable currencies have varied widely.

We invite customers in other countries to do business with us by making an offer, which often takes the form of a quotation or a price list. Any such documents that we produce for export customers should clearly describe the payment terms.

Although there are facilities such as international letters of credit and documentary collections that can help overcome the risks for buyer and seller, we are not going to consider them here. These will be covered in the June article. For smaller exporters who are delivering orders of no more than a few thousand pounds in value, and whose customers are typically from Europe, North America and Australasia, such payment methods are rarely practical or cost effective.

For such exporters, it is likely that business customers will expect to trade on open account, as it is typically done within the UK. There may be exceptions to this such as:

·         On a first order. Many customers will be prepared to pay in advance on their first order, and expect to revert to open account on subsequent orders. In some instances, it may be acceptable to do business on advance payment for the first year or even two.

·         When the order is bespoke. If the exporter is making customised goods to the customer’s requirements, then part or full payment in advance may be accepted.

·         When the order is of a much larger size than the exporter is willing to supply on open account. An exporter should agree with customers the credit limit that is acceptable, and request advance payment for anything over the agreed amount

·         Exceptionally, where the exporter is in a very strong bargaining position, for example because there are no suitable alternative suppliers, it may be possible to negotiate advance payment terms permanently.

So for exporters who are typically going to receive orders of relatively modest value, it’s likely that they are going to be giving credit to international customers. The exporter needs to evaluate the risk before business is accepted. As with customers in our own country, we need to consider the risk of non- or delayed payment. Banks will usually be able to provide credit reports on potential customers, and the exporter may also wish to get a written application from the customer, usually with references.

In many countries, typical payment terms are different to the terms we would expect at home, many customers will typically be trading on terms of ninety days, or much longer in some circumstances. Bear in mind that your customer will have to work with long payment terms from his customer, so don’t dismiss longer payment terms out of hand. It may be the only way that your customer can manage their cash flow.

After considering if the customer is an acceptable risk, and determining a credit limit, the length of time to allow for payment also needs to be clearly agreed. If the terms requested are for a longer period of time than we are used to, we can evaluate the cost to us and reflect this in the prices we offer. The cost of giving credit consists of the actual cost of having our own cash resources tied up (or of having to borrow to meet the terms) and also the risks, especially of non-payment and of an adverse currency fluctuation. The latter will of course depend completely on the payment currency used. Exporters should not fail to incorporate the true costs of credit into their prices.

So in advance of any business, we are going to receive a credit application from the customer, giving financial details of the business, credit references and perhaps a report from a bank or a credit reference agency. Then we are going to formally agree the credit limit, the time limit, and we should also spell out what action we will take in the case of late payment.

It is very important for everyone involved in export sales and pricing to always bear in mind that offers, quotations and price lists should always state the payment terms offered as well as the shipping terms (Incoterms). An export price is not complete unless it stipulates these terms.

Once we have an agreement with the customer, it is very important to keep to it. In the next instalment we will consider the task of managing export credit.

 

Article written by Tim Hiscock – Associate of Strong & Herd LLP

Contact Strong & Herd
to discuss your requirements
Telephone
0161 499 7000
Fax
0161 499 7100
Strong & Herd LLP, Manchester International Office Centre
Styal Road, Manchester, M22 5WB