Credit Where It's Due

 

Setting, monitoring and reviewing payment terms for export customers

There’s an almost unavoidable conundrum facing any business that wants to trade internationally. It’s all about trust.

In business to business transactions, giving credit is commonplace. The smallest business is often able to take advantage of what we call ‘open account terms’ with regular suppliers, and in all probability will need to offer similar trading terms to at least some of its customers. In this time of austerity, it’s a thorny issue for many, as suppliers seek to tighten up on payment times while customers are sometimes inclined to delay payments a little more than usual, just to balance the books.

When buying from, or selling to, a business in another country, this thorny issue can become even more of a stumbling point for three main reasons:

 

1.Geography

Granting credit to customers who are not only a greater distance away from the supplier, but also in a different country brings particular risks in the event of a payment issue. A small business may find it difficult to manage the relationship with the customer who themselves may feel it is easier to default on a payment due to a supplier who is some distance away. Typical methods of credit management, such as a simple telephone call requesting payment can be difficult if the customer speaks a different language that the supplier does not speak. It’s remarkable how a customer who spoke English so well when you agree to supply on 30 days account seems to have lost that skill now you want to talk to him about getting paid.

The costs and risks of chasing and recovering outstanding payments in another country can be substantial, and in many cases can soon be felt to be not worth pursuing, especially if the debt is for a small amount.

2.Currency fluctuations

In the present environment, no currency is exempt from the risk of major fluctuations. The movement of Sterling in the last few years, even against the US Dollar and the Euro has been almost unprecedented in recent times, and future movements have rarely been so hard to predict. It’s one thing to expose the business to a small amount of currency risk for a short time, but the longer the payment remains outstanding, the greater the risk of loss.

3.Country risk

Perhaps the scariest risk of all, there is an ongoing risk of some countries defaulting on debt repayments and triggering another crisis. Country risk used to be something that really only applied to developing countries, but the rules have changed!

 

Many exporters are using a much stricter policy in negotiating payment terms with a new customer. Whereas open account terms were often agreed after just one completed order, it is not uncommon to find suppliers demanding payment in advance for the first 12 months. And even then, credit may only be granted on receipt of a satisfactory application and credit references.

Much depends on the nature of the relationship between the supplier and the customer. If a small supplier is dealing with a very large, established business, the buyer may be in a strong position to dictate terms. But no supplier should expose itself to payment risk without first carefully checking the financial status of the customer, however big they might be.

But there is risk for the customer as well, of course. If the supplier’s business gets into difficulties and is unable to supply, it can have a serious effect on the customer’s ability to trade.

There are ways in which all parties can minimise the risks associated with late or non-payment.

For the exporter, insisting on payment in advance is not always out of the question. But be careful. Payment terms are an important part of the offer that buyers will take into account when choosing a supplier. If your competitors offer credit, it may be hard to insist on upfront payment.

Passing the risk to a third party, for example by using Export Credit Insurance, Factoring, or even International Letters of Credit may be feasible for some business. Anyone who is seriously seeking to develop significant international trade would do well to look into all options from the outset. But letters of credit come with a cost, and are usually not a viable option for smaller transactions. Export Credit Insurance will not only impose a cost on the business, but will usually require the exporter to submit to very careful procedures in granting and managing credit. These procedures usually represent pretty sound business sense anyway. But buying export credit doesn’t give an exporter a licence to give credit without careful analysis.

In my experience, the most important thing an exporter can do to manage their credit risks is to take care to manage their overall relationship with the customer. By getting close to the customer’s business and taking an interest in their activities and goals, a mutual interest in each other’s success can develop. But a close understanding of the customer’s business also means it’s easier to pick up the signs when something has changed, and to recognise the danger signs early on.

Every business needs to keep careful records and manage credit carefully, according to a set policy. Sales staff need to be involved in this process, too. After all, if a customer is put on a stop, it can affect a sales team’s performance quite drastically. Sales people have a unique relationship with the customer and should be used to be the eyes and ears of the business, to keep a discreet eye on what the customer is doing and keep up with changes that can affect their performance such as a loss of key staff, downturn in other parts of the business.

 

Written on 11th July 2013 by Tim Hiscock, S&H LLP Associate

Back to Articles

Public Training Courses

 
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