Deciding on Appropriate Export Payment Terms

An important part of an international sale is determining payment methods. The major options include cash in advance, collections, letters of credit or open account.

It can take a lot of time and effort to make this decision, but every minute you invest in this decision can mean the difference between money in the bank or writing off bad debt.

When selling a product domestically, your company assesses the creditworthiness of the buyer. You might do this by pulling credit reports and checking references. Once armed with the necessary information, you can make an informed decision.

When selling internationally, you need to follow the same process. You must feel comfortable with the buyer's ability to make payment. But it can be difficult to acheive that level of comfort when you're trying to determine the creditworthiness of a company located halfway around the world.

Finding the information you need to make an informed decision may not be as difficult as it first appears.

Where to Find More Information

• Use the internet to locate a list of credit agencies specializing in international credit reports. It's always a good idea to ask exporters what credit agencies they're using and how satisfied they are with the information.
• U.S. Export Assistance Centers offer international company profiles on select companies around the world.
• You can also ask the buyer for a list of references in the United States. Contact the references and find out which payment methods they use and if they get paid on time.

Sometimes, exporters think the cost of obtaining a credit report is too high. However, you need to look at this step as an investment in getting paid, rather than an expense.

Now, if you were selling domestically, you'd be ready to select the appropriate payment term. However, when you sell internationally, you must also pay attention to country risk. Consider the political and economic conditions in the buyer's country.

A buyer may be creditworthy, but located in a country that's unstable. Particularly in countries with weak or faltering economies. A country's central bank or the government could impose internal restrictions that could delay or prevent payment.

Where can you find country information?

• Use the Internet and log onto the International Trade Administration (ITA) website, and select the country that you are interested in for a report.
• If you still have questions and would like to talk to an expert, call the U.S. Department of Commerce USA Trade Center at 1-800-USA-TRAD[E].
• Contact your international banking trade specialist. Working with their international credit and country specialists, they can provide additional information.

Armed with this knowledge, you're set to choose a payment term. If you accept the buyer and country risk, you could offer a collection term or an open account. Both of these terms will encourage the buyer to initiate the payment. However, if you don't accept the buyer or country risk, you may need to choose either a letter of credit or cash in advance.

You must also consider a few additional factors before deciding on a payment term:

• The amount of the order: Don't forget that the letter of credit is the most expensive payment term; banking costs may be prohibitive for smaller shipments.
• Competitor terms: If your competitor is offering an open account but you want cash in advance, you will have difficulty making the sale.
• Buyer-seller relationship: After a period of time, you may want to ease up or tighten down credit terms depending on how the relationship is working out.
• Your capital position: If you need the proceeds from the current sale to start manufacturing goods for future sales, consider cash in advance. Or you may choose a letter of credit where you can somewhat forecast when payment will be received.

Once you've settled on an appropriate payment term, remember that we live in an ever-changing world. A buyer's creditworthiness and/or the country risk may improve or decline over time. Therefore, review all payment terms on an annual basis to ensure you're using appropriate terms.

Remember, the most import aspect of exporting is getting paid!

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This post was originally published in February 2002 and has been updated to include current information, links and formatting.