Taking all the Credit: How to Manage the Financial Risks of Export
19th April 2018
So you’ve taken the bold step of growing your business through export. You’ve done your homework: visited the market, got to know the culture and made sure your products meet local regulations. Protected your IP in that country. Identified the right shipping method, and the export documentation needed. Finally, you’ve found a customer, and shaken hands on your first sale.
But how do you make sure you get paid?
Your new customer is on the other side of the world and both of you are taking a risk: you that your customer fails to pay; they that they pay but never receive the goods. The distance makes you both nervous, and because you operate in different countries with different legal systems, you each worry that a dispute could provide difficult or costly to resolve.
As an exporter, there are various options to help manage this risk:
- Start small, think big. Build up progressively from a small initial order to foster confidence all round.
- Advance payment. Ask for the whole price up front, or a payment to account. This is great for you, but a disincentive to your customer who won’t want to send real money round the world without knowing for certain it will receive the goods. It’s also not great comfort if you get a deposit but your whole margin on the deal is still at risk.
- Credit checks and trade references. You should always do your homework on the customer. Your bank or a credit agency can help here, or your local Chamber of Commerce. Don’t be afraid to ask for references from other UK companies dealing with the customer – and be prepared to be asked for references in return. A small investment here can bring peace of mind, but more importantly identify if your customer really is as blue chip as they first appear.
- Trade credit insurance. This will provide cover if your customer fails to pay, can’t pay due to force majeure (circumstances beyond their control such as a natural disaster) or goes bust. Your business insurance broker will be able to help, or try UK Export Finance, a government-backed insurance scheme designed to ensure no viable UK export fails for lack of finance or insurance.
- Export factoring. A factoring house, often a bank, purchases the right to collect your foreign customer accounts and in return pays you cash at a discount from the face value. It’s not likely to be suitable for you in the early days of export. You’ll normally have to build up a history of foreign transactions for a factor to consider you, and it’s designed for a regular “book” of exports rather than a one-off deal. This can be an expensive form of credit but it can also be a good way for an SME to preserve cash flow during a period of rapid export growth.
- Letter of credit. Sometimes called “documentary credit” this is a form of guarantee from a bank. In exchange for you providing the bank with evidence that you’ve supplied the products in line with the contract, the bank will guarantee payment within a specified time. It’s a very secure form of payment for you, as the risk of non-payment is in effect moved from you to the bank. It comes at a cost – no bank takes on risk without charging a fee – so you should balance that against the availability of the other options mentioned above. You will need to provide exactly what the letter specifies in the way of documentary evidence, or the bank won’t pay up. This can sometimes cause delay or bureaucratic hassle, but also gives assurance to the customer that you will fulfil your side of the bargain.
Finally, whatever approach you take, you must set up a robust written legal contract with your customer. Seek good professional advice from a lawyer experienced in export.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at April 2018. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.