Many businesses, especially in B2B markets, offer credit to buyers, often on 30, 60, or even 90 day terms. When embarking on trade with overseas markets you will need to decide whether it’s prudent to offer credit to your new, international customers, as there are additional factors to consider.
To make this decision, it is important to consider the following:
The decision on whether to offer credit should always be taken on a customer by customer basis and never as a standard mode of operation, as each customer will have a different level of risk. This is especially true when it is a new customer that you have never dealt with before.
Due diligence is of utmost importance and should ideally be done before you negotiate a contract. You need to know whether the business is a bad credit risk based on their trading history with their other suppliers. This can be done by getting a credit reference from a credit reference agency or due diligence specialist, ideally one that has real time access to company data. You can also request trade references from the buyers’ existing suppliers.
Trading in overseas markets adds an additional layer of complexity to trading domestically. Different countries will represent different levels of risk that the buyers themselves will have no control over. Countries with volatile economies or political regimes will be higher risk and may also impose currency exchange control regulations that can add delays to getting paid. Due diligence on the country is just as important as due diligence on the buyer.
There are certain advantages to being able to provide credit to customers, the most obvious being that it’s attractive to your buyers and can therefore help you to secure contracts and may even give you more scope to charge more (many will expect discounts for early settlement of bills). For some customers it may be a dealbreaker. However, don’t take unnecessary risks just to win the business.
On the other hand, consider the implications to your business. How will it impact on cash flow if you have to wait for payment and what are the costs of recovering payments if they don’t come in on time? Recovering payments from companies overseas can be much more complicated than from UK businesses.
Of course, the decision to offer credit isn’t a simple yes or no: you have options that allow you to offer credit but minimise the risks, at least in the early stages of a trading relationship. You could keep terms short to begin with of just 30 days, or even less, and keep credit limits low – although this will necessarily limit the scale of orders. Once the customer has proved themselves to pay reliably, you can make terms more favourable over time.
One way of reducing the risk of offering credit is to take out trade credit insurance. This covers the risk of non or late payment. Clearly the cost of the insurance has to be weighed against the value of the contract and the implications of non-payment. You could also consider factoring your invoices, passing the risk to a third party in exchange for a proportion of the value of the invoice.
Finally, there are many different ways of getting paid and evaluating the risks involved - do read other articles around this topic.
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