How do I offer terms to an overseas buyer and feel secure?

The ability to provide deferred payment terms to an overseas customer is a significant bargaining point when negotiating a sales contract. It is not common for goods to be paid for “upon delivery” which means that credit control is an important function in any export business.When starting a new relationship, whether it is in a new market or one that you have experience in, it is vital that all parties can fulfil their obligations.

It is usual for such a relationship to begin with the buyer opening a letter of credit (L/C) in your favour. The payment terms can be clearly mentioned on the L/C although the issuing bank will charge more commission for an L/C that contains a usance period. That is because their risk is greater than under a sight L/C because they are “on the hook” for longer. To secure payment terms, the buyer will have to accept that he is liable for the additional fees that must be paid.

Certain larger multinational businesses may try to leverage their reputation by demanding “unsecured” credit from day one. That is, of course, a judgement call for your business that could lead to some heated discussion between sales (who want to sell as much of your product as they can) and risk management/credit control (who are responsible for ensuring timely settlement of invoices).

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There is no hard and fast rule for this situation and it comes down to many factors. There is little doubt that offering unsecured payment terms to reputable overseas customers will enhance your firm’s reputation.However, at the end of the day, given the production costs and other added expenses you will face, and the finite extent of your bank facilities by allowing unsecured credit, you are basically allowing your client to use your overdraft facility guaranteed by you.

If your client complains at the thought (and cost) of a usance letter of credit and your credit controllers feel confident in the firm’s ability to pay, you may consider “cash against acceptance” as an alternative to a letter of credit. This is another one of secure methods of payment available between international businesses.

Cash against acceptance can involve a bank but doesn’t have to. Once the goods are shipped, you authorise the shipping document (bill of lading or airway bill) to be released to the buyer upon receipt of his signed “acceptance” that he will pay the amount due on the agreed date sometime in the future.

While this method doesn’t categorically confirm payment will be made in the same way as an L/C, you will be in possession of a legally binding document that is enforceable by law in the buyer’s country. If you are in any doubt about the client, you can ask for a bank to be involved. In this case, you will send the documents via a bank who will only release the documents upon receipt of the signed acceptance. You can obtain an even greater measure of security by asking the bank to add its guarantee to the acceptance but, in that case, it is likely that your buyer will expect you to pay the bank’s charges.

If you have a longstanding relationship with the buyer, you may have considered or already be operating under “open account” terms. In such a relationship, the shipment of goods and the payment become almost completely separated. For example, if you agree that you will invoice your customer on the last day of every month, you may have made any number of shipments during that month and the goods will have been delivered and become part of the buyers supply chain. In that case you are offering terms to your buyer but have no security over the goods.While you will have no security over the goods the timely receipt of payment becomes paramount. In that case it pays to use a secure online payment or a secure money transfer firm. In the past, your bank will have insisted on you passing your FX business through them. They will have benefitted from the lending relationship and received additional profit from both the FX trade and transaction fees.

Current regulation means that banks are no longer to tie in their clients to “bundles” of services and you are free to choose who you use for your safe money transfer.

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The advent of Fintech firms in this space means that you now have a fast and competitive method of arranging secure international money transfers from firms that pride themselves on customer service since your business is precious to them and not part of a bundle which they add on simply to increase revenue.