Exporters who are simply looking for ways to ship a product and get paid for it get barraged with a myriad of trade terms that each require their own seminar: Increase your overseas sales! Dealing with Discrepancies! Get Paid Quicker! We have all been through these seminars, and often walked away confused and bewildered.
I am constantly searching for ways to provide exporters with tangible methods of improving the collection of their foreign receivables. After watching a popular Saturday morning home improvement television program, I observed similarities between a homeowner and an exporter. During a typical renovation, the program host walks the homeowner through the project and explains how to approach the various aspects of the remodeling. A term that the program host uses frequently is, “Sweat Equity”. This term refers to how much effort needs to be put forth by the homeowner to save time and money. A successful remodeling project is always accomplished through the partnership of the homeowner and the program host that coordinates the project.
Get your bank involved early
Because of the complexity inherent in international trade, it’s a good idea for the exporter to also get their bank involved at the very beginning of the transaction. This partnership between the exporter and the bank is essential since the bank will be collecting the foreign receivable. A certain amount of “sweat equity” on the exporters part is needed to research and understand the risks associated with each transaction.
Trust and Risk are the two words that drive a good international sales plan. Knowing who you are selling to and where is the determent to how much risk is involved in the transaction, and the level of trust you have with your customer. Another key element (that is often overlooked) of an international sales plan is payment terms.
Payment terms are negotiable and asking for a letter of credit may not always be the best approach. Asking for a letter of credit from a foreign entity that traditionally sells on open terms may cause an exporter to lose the sale. Many exporters feel that it is in their best interest to ask for a confirmed irrevocable letter of credit. That’s fine if the terms and conditions of the letter of credit are also spelled out in the sales contract and all parties involved in the transaction know exactly which documents are needed to facilitate payment.
Find an ally
Virtually all commercial banks have an international trade salesperson whose mission in life is to unravel complicated international transactions. This same individual may also assist relationship/account managers in assessing the risks inherent in a particular trade transaction. By seeking out and working directly with your bank’s international trade representative, you not only have tapped into the expertise needed for your transaction, but you also now have an ally who has taken the time to understand your business.
This individual often has the resources available to effectively put in place an international sales plan that will serve as a blueprint for all your global business. Understanding the two major risks that foreign trade usually presents, can ease your international anxiety. Country Risk is the risk associated with doing business in the buyer’s country. This risk covers the country financial condition, stability of currency, social and political climate, and availability of foreign. Commercial risk is associated with the buyer and/or his bank.
Since the purchase is in another country, the exporter has less than reliable information regarding the financial integrity of the buyer. Risk and trust are two key elements in international trade and should be assessed with each new client.
The sales plan and methods of payment
Most companies international sales plan consists of asking for a confirmed letter of credit. Without specific terms, a letter of credit can be a nightmarish experience since the buyer’s bank will typically structure the instrument to benefit their client (the importer) since you have neglected to ask for specific terms. Understanding basic payment terms is your first step in putting together an effective sale plan.
- Cash in Advance is by far the most desirable method of payment for the exporter. However, the advance payment situation for the buyer creates cash flow problems and increases the buyer’s risk. Your competitors may be offering more relaxed terms of payment thus shutting you out of the deal. This method may be more effective if the exporter is willing to accept payment in the buyer’s currency. The exporter may hedge their foreign exchange exposure through a forward contract.
- Open Account requires a great deal of trust on behalf of the exporter. Failure of payment may mean the exporter has to pursue payment abroad, and the lack of documents and participation by banks makes legal enforcement of claims difficult. In a very competitive market, this may be the only method for an exporter to secure the deal.
- Documents against payment/acceptance utilizes the strength and influence of the bank’s acting on behalf of its respective clients. Although a good low-cost alternative to letters of credit, this method of payment assumes no obligation on behalf of the banks involved. Most letter of credit transactions fall into this category once discrepancies cannot be corrected or resolved prior to collection. The exporter may opt for payment later once the documents are accepted by the buyer. The buyer’s bank accepts these documents for a payment obligation later.
- Letters of Credit carry the obligation of the exporter’s bank if, and when, documents are found to be in order. Letters of Credit may be “advised “to the exporter without any obligation on behalf of the exporters bank. The exporter’s bank will review the letter of credit and ensure that the instrument received is authentic. If the exporter presents documents in accordance with letter of credit terms, the advising bank will affect payment. However, if discrepancies are found the exporter’s bank will send the documents out to the buyer’s bank for collection. When the exporter’s bank adds their “confirmation” to the letter of credit, payment is affected immediately when documents are found to be in order. This protects the exporter from foreign payment risk. If documents are presented with discrepancies under a confirmed letter of credit, the exporter’s bank is under no obligation to honor the documents. The most effective way to utilize a letter of credit, is to negotiate the terms and conditions with the buyer prior to issuance. Requesting that a “sample” letter of credit be sent to your bank for examination will reduce the need for amendments. The terms should be simple enough for the exporter to obtain the necessary documents for collection of payment.
Other points such as shipping terms, expiration/shipping dates, exact merchandise description and any other special terms and conditions that are required to facilitate the payment and shipment should be included in your sales plan.
It is in the exporter’s best interest to understand the various methods of payment and their applicability. More importantly, the exporter should view these methods of payments as opportunities to negotiate a mutually beneficial deal with the importer and to cultivate long-term international business relationships. Another advantage and useful tool for an exporter, is the Export Import Bank of The United States.
By involving your bank, a local freight forwarder and your local trade organization, you have assembled a team that will have you well on your way to global success.
If you’d like to learn more, please reach out to me, Ralph Bocchino, Commercial Loan Officer, International Trade Specialist, by email at rbocchino@valley.com or by phone (315) 406-7628.
