PrintMany small businesses shy away from exporting because of worries about getting paid. Fortunately, businesses can employ several methods that take the risk out of exporting and allow them to ship goods overseas with confidence that you’ll receive payment.
Here’s a look at the export payment options.
Documentary Collections
Essentially, documentary collections are the overseas equivalent of cash on delivery, or COD. They operate under the Uniform Rules for Collections, developed by the International Chamber of Commerce. There are four parties involved: the seller or exporter, the seller’s bank, the buyer, and the buyer’s bank.
After the buyer and seller agree on a price, the seller submits a collection document to its bank. The seller’s bank sends this document to the buyer’s bank, which presents it to the buyer and collects the payment. The buyer’s bank then forwards the payment to the seller’s bank, which notifies the seller that payment has been received. The seller then releases the goods to the buyer.
Letters of Credit
With letters of credit, a bank extends credit to the foreign buyer. There are three basic types of letters of credit:
- Revocable: Rarely used in recent years, revocable letters of credit allow the bank extending credit to alter the terms of a revocable letter of credit without consulting the seller. As a result, revocable letters of credit provide no protection against loss.
- Irrevocable: The form most used today, irrevocable letters of credit define the amount of credit the bank is willing to extend to a foreign buyer as well as the terms. The commitment then cannot be changed. If the buyer doesn’t pay, the bank is out the money, not the seller.
- Standby: In a standby letter of credit, the bank pays the seller only if the foreign buyer does not pay for the goods.
Buyer Financing
The Export-Import Bank of the United States, our government’s export-lending arm, also guarantees short-term loans of up to a year to foreign buyers to help U.S. companies increase their exports. If Ex-Im guarantees the financing, you know the payment is going to come through.
Insurance
When it comes to exports, it’s best to expect the unexpected. Even if you’ve found a great overseas customer and have been selling to it for a while, there are many ways your export sale could go awry.
For instance, while your goods are sailing across the sea, the ship could sink. The customer’s bank could be nationalized and all its accounts seized. The customer’s store could burn down. You get the picture; anything can happen.
That’s why there’s export insurance. The Ex-Im Bank is one of several popular providers of export insurance that covers both commercial risk (your customer goes bust) and political risk (war or sudden currency fluctuations).
Having export insurance can offer distinct advantages. It allows your company to offer credit terms to more customers or expand into new countries with the confidence that if anything goes wrong you’ll still get paid. Some exporters get insurance rather than relying on letters of credit. There are insurance policies that cover a single customer, and multibuyer policies that cover all of an exporter’s customers.
Open Account
Once you have built up a trusting relationship with your overseas customer, you may allow it to buy on “open account.” Essentially the customer takes delivery of your merchandise and sends you a payment, much as a good U.S. customer might. You may even offer the customer terms where it doesn’t have to deposit the payment immediately, which would allow it more time to collect money from customers to make the payment.
But beware: Selling exports to open account buyers is the riskiest way to collect money from overseas customers. If the customer doesn’t make its payment for any reason, you’re unprotected from the loss. So tread cautiously when it comes to letting foreign buyers pay on an open account.
Business reporter Carol Tice contributes to several national and regional business publications.
