Finance, insurance and getting paid
Setting up the right financial arrangements for your export business is essential. Getting it right will help you
- avoid bad debts that will adversely affect the profitability of your business
- prevent the negative impact that late payments have on your cashflow
- reduce the cost of chasing late payments
Making sure that you can finance the contract, manage currency and get paid are key issues for all exporters.
Getting paid on-time and in full is the ultimate aim for an exporter and you will need to choose a payment method that is right for your relationship with your customer. The more you minimise your risk, the more risky the transaction for your customer.
When supplying goods, there are 4 primary methods of payment for international transactions:
When supplying services overseas, you cannot protect yourself with payment methods such as letters of credit and documentary collections that are used to reduce the risks when exporting goods. It can also be difficult to prove that you provided the services, and expensive or impossible to recover unpaid debts through the local courts.
As it can be difficult to prove that you have provided the services, you should make sure you have a clear agreement on payment arrangements before supplying services. As with the export of goods, some issues that should be agreed in advance include:
- how much will be paid, in what currency, and when
- who is responsible for bank charges
- what will happen if the customer fails to pay
- where payment will be made, eg to your UK bank account
- who is responsible for any taxes
It may be worth researching your customer’s creditworthiness and you should consider getting credit insurance to help protect you in case of non-payment. Stage payments may be a good idea if the services are to be supplied over a period of time as this would help to reduce risk while improving your cashflow.
Payment in advance before shipment may seem to be the most desirable method of payment as it supports your working capital and you will receive payment before the ownership is transferred to the buyer. However, this is the least attractive option for the buyer as it creates cash flow problems and increases risks for the buyer.
Advance payment could be considered essential when you have limited confidence in your buyer or when the political or economic situation in your buyer’s country increases the risk of non-payment.
If you have a unique, market leading product, you may be able to negotiate for payment in advance. However, in a more competitive marketplace, you may lose out to competitors who offer more attractive payment terms.
One way of reducing the risk for your buyer would be to provide an advance payment guarantee. UK Export Finance can advise on this
Letters of credit
Letters of Credit are one of the most secure instruments of payment available to exporters. A Letter of Credit is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions set out in the Letter of Credit have been met. This can offer a guarantee to the seller that they will be paid, and the buyer can be sure that no payment will be made until they receive the goods.
The Letter of Credit must reflect the agreement you made with your buyer and should be in place, ideally, before you commence production and, in any event before despatch. You must be sure that you can adhere to all the requirements listed in the agreement such as latest shipping date and mode of transport, and that all documentation requested can be provided.
There are several different types of letters of credit available to use, depending on the circumstances. The cost to you will depend on the type of letter of credit and circumstances of your buyer. Read more about Letters of Credit and how they can be used to reduce risk in international trade.
Once your products are shipped, lodge all the necessary documents with your bank. The bank will check that the documents meet the requirements in your letter of credit. Your documents must be in strict accordance with the letter of credit, otherwise your bank will not be able to claim payment from the issuing bank.
With a documentary collection, the exporter prepares a bill of exchange stating how much is to be paid and when. Once the customer accepts this bill of exchange, they are legally liable for payment. Only then does the exporter, usually through the bank in the overseas country, allow the customer to have the transport documents needed to take possession of the goods.
This method provides you, the exporter, with greater control than with open account transactions as documentation is passed through banking systems. In the event that your buyer does not pay or accept the bill of exchange, you will retain ownership of the goods. You may, however, incur transport costs to bring the goods back to the UK.
With Open Account, you expect payment after you have sent goods to your buyer along with an invoice and other necessary documents such as a Bill of Lading.
Your customers may ask you to offer credit terms or you may find that you need to match your competitors in this way.
The demand for your product, your price and how badly you need to do the business will all affect what terms you decide to offer. An Open Account, with an agreed payment period, is increasingly required by buyers but it should only be considered where you know a lot about your buyer and have absolute confidence in the integrity of the people involved.
However, extending credit terms will have a real cost impact on your business because it impacts cash flow, so it is important to estimate the cost of the time it takes to receive payment at the end of the credit period and to build this cost into your price.
The risk with Open Account is that the buyer can receive your goods and then not pay you, leaving you totally exposed to buyer credit risk, as well as possible country and currency risk. Some of these risks could be mitigated through the use of credit insurance.
Exchange rates can be a complicated area for exporters and you should discuss exchange rate issues with your bank or financial adviser and make sure that you understand exactly what is involved.
Whilst using pounds sterling as your contract currency will avoid this problem, it will pass the currency fluctuation risk on to your customer and may make you uncompetitive.
There are a number of options for managing currency exchange rate risk, including:
Quoting in pounds sterling
The option of quoting your prices in pounds sterling carries the least risk and cost for you as an exporter. You are guaranteed the amount you will receive in pounds sterling and it is your customer who has to bear the exchange rate risk. In a buyers market, this will make you uncompetitive.
Foreign currency accounts
If you pay for purchases in foreign currency, it is worth considering this option. You would be able to match foreign currency receipts to outgoings and thereby minimise your exposure to the risk of currency fluctuations.
Forward exchange contracts
Forward exchange contracts are a low risk option for both the buyer and seller, although there are costs involved for the seller. Also known as hedging, this option locks in the exchange rate with your bank for a given day in the future. There is a cost to the seller associated with this type of arrangement. This will vary depending on the value of the transaction and the flexibility of the contract you agree.
You should contact your bank or a specialist currency management company to evaluate the available options and to select the right one for you.
Export finance and insurance
If you are planning to export goods or services from the UK then it is likely you’ll need some form of credit guarantee or insurance to protect you against non-payment or other financial issues.
If you can’t get what you need from the private market, UK Export Finance (UKEF) may be able to help. It provides guarantees, insurance and advice in support of UK exports large and small. Working across a wide range of sectors, UKEF can consider support for exports to over 200 countries.
UKEF has its own risk assessment framework and its work is focused on helping UK exporters maximise the opportunity to do more business overseas by working closely with exporters, banks, buyers and project sponsors to:
- insure UK exporters against non-payment by their overseas buyers
- help overseas buyers to purchase goods and services from UK exporters by guaranteeing or funding bank loans to finance the purchases
- share credit risks with banks to help exporters raise tender and contract bonds, in accessing pre- and post-shipment working capital finance and in securing confirmations of letters of credit
- insure UK investors in overseas markets against political risks
UKEF has a network of Export Finance Advisers located across the UK who act as local points of contact to introduce exporters and businesses with export potential to finance providers, credit insurers, insurance brokers, trade support bodies and sources of government support.
The Export Finance Adviser for Wales is Christian Syme (Email firstname.lastname@example.org , Telephone +44 (0)7580745923
See advice on managing your cashflow