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July/August 2007 — Vol. 85, No. 6
Get the payment terms and
the cash you need to go global
By Chris John Amorosino
Freelance writer in Unionville
Related article:
You want to export, but how can you assure payment? And what are your financing options?
The U.S. Department of Commerce says you must balance the need to provide attractive payment terms with the need to minimize your business’s risk of nonpayment. Each of the four major payment methods for exports has positives and negatives.
1. Cash in advance. As an exporter, your business can avoid any credit risk by requiring global buyers to pay you in advance through a wire transfer or credit card. But you may lose customers to competitors with better payment terms, since this is the least attractive option for buyers. And, credit card payments for international transactions can be a “real problem,” says Carl Jacobsen, director of the Department of Commerce Export Assistance Center in Middletown. “You can check with Visa and MasterCard here for authorization of a card and be told there’s no problem, when the international card is actually a stolen one.”
2. Letters of credit. For international traders, letters of credit (LCs) are among the most secure payment instruments available. An LC is a bank’s commitment that the buyer will pay the exporter. LCs work well when you don’t have reliable credit information about the buyer but you do know the buyer’s bank is creditworthy. LCs also protect the buyer somewhat since they don’t pay until the goods have been shipped or delivered as promised.
Joe Balzo, vice president of international services with People’s United Bank in Bridgeport (formerly People’s Bank), says you still should perform due diligence even if you can get an LC. Do credit checking. Learn how stable the country that you may export to is. Look for other businesses you know that may have experience with your potential buyer or the potential export country.
Lydia Gregor, vice president and global trade officer for the Atlantic bank region of Wachovia Bank N.A. in Stamford, advises using LCs carefully. “The first discrepancy you have in your documents immediately takes the bank off the hook, and now all of a sudden you’re on an open account,” she explains.
3. Documentary collections. In these transactions, you (the exporter) entrust the payment collection to your bank. Your bank sends the documents, along with payment instructions, to the buyer’s bank. The buyer usually must provide payment of the draft either as soon as the documents arrive (document against payment, or D/P) or by a specified date (document against acceptance, or D/A.) On the plus side, your bank acts as a collection facilitator, and this method is generally less expensive than LCs. On the negative side, documentary collections offer no verification process and limited assistance in the event of nonpayment.
4. Open account. With this method, you ship the goods and deliver them before any payment is due. Your ability to offer open accounts can be vital to export success, according to Balzo. For obvious reasons, importers prefer this method, but for you (the exporter), open accounts offer the most risk.
Getting export financing
When competitive market pressures or other factors require you to offer the most liberal of payment options (open accounts), the five trade financing techniques described below can help minimize the risk of nonpayment.
1. Export working capital financing. If your business lacks sufficient liquidity to cover the entire cash cycle (from purchase of raw materials to the ultimate collection of payment), you need export working capital financing. Most often, this type of financing takes the form of a loan or a revolving line of credit.
2. Government-guaranteed export working capital programs. Look into the Export-Import Bank of the United States or the U.S. Small Business Administration (SBA). Each offers programs that guarantee export working capital. Use this option when commercial financing isn’t otherwise available or when your pre-approved borrowing capacity isn’t sufficient. Jacobsen says 99% of the time, businesses use their local bank to set up these export working capital programs.
3. Export credit insurance. This insurance protects businesses against commercial losses, including default, insolvency and bankruptcy, and political losses, such as those resulting from war or nationalization. It enables you to increase sales by offering liberal open-account terms, and it provides security for banks.
4. Export factoring. Factoring involves discounting short-term (up to 180 days) receivables. It’s a trade financing technique usually reserved for consumer goods. The exporter transfers title to short-term foreign accounts receivable to a factoring house for cash at a discount from the face value. The factoring house assumes the financial risk on the ability of the importer to pay, and it handles collections. Balzo says export factoring is a tool used more in Europe than here.
5. Forfaiting. In forfaiting, the exporter sells medium-term (180 days to seven years) receivables to the forfaiter at a discount. In exchange for the forfaiter assuming all risk, the exporter receives cash. This technique allows your business to extend open-account terms and incorporate the discount into your selling price. Forfaiters usually work with capital goods, commodities and large projects.
For more information, download the Commerce Department’s new “Trade Finance Guide: A Quick Reference for U.S. Exporters.”
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