Overseas collections

According to the The Institute of Export and International Trade, ensuring payments received from overseas buyers carries a greater level of risk than domestic business. Why is this so? Fundamentally, exporting entails getting to grips with different cultures, processes, customs and local practices in overseas territories, not to mention currency risk when invoicing in currencies other than GBP.

Obviously, the basics of sound credit management still apply. Whilst it may be more difficult or costly to underwrite overseas customers the rules of ‘Know Your Customer’ (KYC) still apply. Mitigate the risk in the customer first by understanding who you are dealing with and, crucially ascertaining that they are ‘good’ for the credit being advanced to them.

More a topic for the lawyers but still relevant to credit controllers is the question of jurisdiction and applicable law; a failure to understand the nature of the contract being entered in to will materially affect the prospect of successful payment.

There can be significantly different outcomes depending on which country’s courts have jurisdiction and which country’s laws are being applied to the interpretation of the contractual terms.

The next consideration is price, or more correctly; margin. It is self‐evident but often disregarded that the costs of export will be higher thus eroding margin due to the additional shipping, customs clearance and formalities involved This may result in the exporter selling in larger quantities to minimise costs but increasing the risk in doing so and of course tying up more cash.

The need to get paid on time becomes even greater. This risk can be mitigated through an understanding of international banking and the mechanisms available such as letters of credit to support simple open credit terms. Alternatively trade finance may be the best way of bridging any cashflow gaps. Payment terms in overseas markets are often longer than is the tradition in the UK and even in this digital age distance creates delay, extending the payment cycle. There is no substitute for negotiating payment terms aligned to the risk and agreeing reliable payment arrangements with each customer and checking a customer’s ability to pay.

Attention to detail is crucial and an understanding of export documents is required. Above all, accuracy is key. A major cause of payment delay in international transactions is inaccurate or incomplete paperwork. It is essential to know what documents are required in each country and realise that not every country has embraced the latest technology. There are still many parts of the world that rely entirely on paper, rubber stamps and in‐trays.

Above all managing export risk relies on the customer not going bust before the supplier is paid, paying the price on the agreed terms, having the currency to pay and being able to remit payment. Consider also risks beyond the buyer and in the territory itself.  Is the country politically stable?  Is there a risk of cancellation of export licences  Is there a sudden change in the legal framework which will either prevent delivery of goods or payment? All of these factors must be considered, understood and, when necessary, mitigated.

Hopefully you have found this information useful but it’s likely you will have questions that require answers tailored to your exact situation. Please get in touch if this is the case.

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