Should you extend credit to international clients? For many small business owners the idea can be daunting. Indeed, a lot of question marks — and nervousness at the unknown — are bound to arise. Why not just stick to cash or letters of credit when dealing with international customers? What if a customer halfway across the world doesn’t pay?
To be sure, there are risks when you extend credit to international customers. But there’s also the potential for large financial gains. The best way to decide what to do is to determine what the risks and rewards are, then weigh them carefully against one another.
First consider why you extend credit to your domestic customers. Quite simply, it tends to increase sales by making your products or services much easier to buy. Well, the same likely holds true for international clients. Having to arrange for advance payments and/or letters of credit is cumbersome, to say the least, and it may be enough to send an interested international client somewhere else.
Next, analyze your competition overseas. Is there a significant market for your business elsewhere? If so, extending credit to international customers will likely enable you to gain some of that market share. Offering credit may entice buyers to switch from your overseas competitors because you’ve just made it easier for them to work with you.
What’s more, credit terms justify a higher profit margin for you and can substantiate a higher selling price for your products.
Of course, there’s also a downside to offering credit to international customers, and you need to determine if the risks are manageable for you. Is extending credit to a foreign client substantially riskier than doing so with a domestic client? If either client is slow to pay, you have the leverage of denying future shipments. If a domestic client goes bankrupt, your potential recovery is minimal. If your client continues to operate but simply switches to another supplier, executions and garnishments are available in foreign countries as well.
Your company’s credit department can acquire the knowledge to make your international collection efforts as successful as your domestic ones. At the same time, you should acquaint yourself with an international collections attorney who has a good track record.
But an important factor in determining whether you can profitably manage international credit will be your ability to collect delinquent accounts in-house. If every slow-paying international account is sent to an outside collections attorney, the cost becomes prohibitive. The same, however, can be said of domestic credit.
An important note: Since English is the international language of business, insist that all documents be drafted in English. This will give you the upper hand as ultimately disputes will be resolved in English, whether through negotiation or litigation.
If you’re unable to resolve problems on your own, hire an experienced international collections attorney. It’s bound to be less expensive — and more effective — than paying your existing attorney to research unfamiliar territory. Be sure to comparison shop and take advantage of things like flexible billing. Find an attorney who will agree to be paid a minimal hourly fee plus a small percentage of the amount collected.
When properly managed, extending credit to international clients can be a boon to your business. But you should have the collection skills and/or resources to handle delinquent accounts in-house or have them readily available at a reasonable cost. That’s what will make it financially worth your while.