Customers Don't Pay On Time? Use These 3 Workarounds To De-risk Your Exporting Business
Being in the export and import business can be lucrative and come packed with benefits. However, as with all types of businesses, there are a number of financial risks involved. One of them is when your customers do not pay. So, what do we mean by that?
For starters, when dealing with customers or business partners, money will always be a sensitive topic. If money matters are not handled well, it could lead to poor relationships with your clients and give you unnecessary mental stress. As an exporter, sending containers packed with products and shipments is one of your basic responsibilities. Even if you fail to receive payments from your customers, these containers must still be sent out, or you risk being fined by ship deck or logistic companies. It amounts to a lot of risks that an exporter must take on.
Another issue is when payments from your customers do not arrive on the same day as the day you’re supposed to ship out your container. When this happens, you incur risk as a merchant and exporter of these goods.
Financial changes happen quickly and out of the blue sometimes. That’s why we have listed out three workarounds to this problem that can help you as an exporter. Read on to find out more.
This article at a glance:
1. How important are contracts in business deadlines?
It is a must to have a contract or at least a purchase order before you start work. This protects your rights as an exporter when dealing with customer requests.
2. What should you always do before confirming a business sale?
Never skip the step of performing a detailed know-your-customer (KYC) check. The more stringent you are at your KYC responsibilities, the lesser the financial risk you are getting yourself into.
3. What are some payment terms to consider as an exporter?
From the least to the most risk, here are the types of payment terms: payment in advance, letter of credit, documentary collection, and open account. Read on to find out more about these terms you can consider following.
Firstly, have all contract clauses stated in black and white documents
The first and most important of the four workarounds is to create a contract. In fact, it is a must to have a contract in place before you start any type of work. Don’t be worried about seeming too upfront, it’s a very common practice in the industry to request for black and white proof of payment expectations before commencing work. Normally, the contract should come from you if you’re an exporter in this scenario.
Remember, your contract should include your terms for payment, your payment schedule, any prior deposit agreements, and how your customers can make payment. The point we’re trying to make is that you have to make your credit terms and conditions very clear, and include a clause in the contract that states your right to exercise your statutory rights to claim compensation if you are not paid according to the agreed upon credit terms.
Even if your customers are based overseas, technology is so advanced these days that remote contract signing will not pose any difficulties.
Tip: Adobe is now in partnership with Microsoft Teams to provide fully seamless integration to sign contracts over video calls. For peace of mind, initiate a video call over Microsoft Teams with your client, and you can both sign the contract in real time using Adobe Sign. Worried that your e-signed documents will not be recognised in the eye of the law? Not to worry, online documents with e-signatures are considered valid and legal documents. This brings us to our next point – knowing your customer.
Secondly, always perform your due Know-Your-Customer (KYC) diligence
How well do you know your customer? That’s why we strongly advocate that you always check, double check, triple check. Do all the checks you need before you start working with any company. Why are KYC checks at the top of our list?
Performing KYC checks on a potential business partner protects your hard-earned company from dodgy dealings such as fraud, money laundering, human-rights violations, corruption, and bribery. To enjoy a peace of mind when working with your customer or client, conducting thorough KYC checks can reduce any risks to your company, including the risk of your customer not making payment for work done.
There are three main points you should be looking out for when performing KYC on a company.
- Ensure that basic information such as names of the company’s directors, business addresses, social security numbers, company numbers, etc. are available.
- Make sure that the company is not suspected or previously involved with any criminal activities.
- Confirm which jurisdiction the company falls under, just in case you have to claim your rights for breach of contract.
Another way to avoid delay or failure in paying is not to rush into new partnerships immediately. We understand that as a business owner, new jobs are often hard to come by. Nonetheless, take the time to ensure you are actually working with people you trust. For newly registered companies or startups, you could even ask for a deposit or partial payment upfront to keep your backs covered.
Lastly, minimize the risk of non-payment by choosing the right payment terms
So, how do you attract overseas buyers but also gain that edge over your competitors? By choosing the right payment terms that are both advantageous to you and to your buyer.
There are four common export payment terms for exporters, sorted out from least to most risk to make it clearer for exporters like yourself.
1. Payment in advance (least risk posed to the exporter)
The most straightforward type of payment term, but also less attractive for your buyer. After all, which buyer will prefer to pay before receiving their goods or shipment? Don’t forget, the least risky form of payment for you means it’s the riskiest method for your buyer.
- The exporter receives payment at the time of sale or contract signing.
- Receiving payment in advance gives you cash flow.
- Easiest on your accounts team to handle.
- Least attractive for your buyer as they have no guarantee that you’ll deliver the goods as agreed upon.
- Lessen the buyer’s cash flow and may result in them borrowing to pay upfront.
2. Letter of credit
This payment method can be both advantageous to you and your buyer at the same time. It works most similar to a normal buy and sell transaction. When your buyer receives their goods, their payment is transferred to you. How the letter of credit works is that once you and your buyer settle on the terms and conditions of the sale, the buyer arranges for their bank to prepare a letter of credit based on the terms of sale. Once you have completed all terms and conditions of the sale without fail, the bank will then send the letter to your bank for you to receive payment.
3. Documentary collection
Third on the tier list is documentary collections: documents against payment and documents against acceptance. It is a method where banks act as intermediaries between exporter and buyer. This method poses less risk than an open account but more risk than a letter of credit.
Documents against payment / cash against document: The importer makes the payment at sight
Documents against acceptance / cash against acceptance: The importer makes the payment on a specified later date
Using the documentary collection method works well for both the exporter and importer. As the exporter, you get to retain physical control of the goods until you receive payment. For the importer, it means that they only pay for the goods after they are shipped out by you.
4. Open account (highest risk posed to the exporter)
We don’t encourage you to choose this option not only because it is the riskiest method, it is also very disadvantageous to you and your business as a whole. Offering open account terms to your buyer means you’re putting yourself at risk of getting paid late, or not getting paid at all. That said, although open account terms can attract numerous buyers, they may not be the right buyers you want coming to you for business dealings.
What to do if your customer refuses to pay?
Well, you could have done everything right, but your customer just refuses to make payment for whatever reason. At this time, remember that you can be strict in exercising your right to demand payment. Here are some steps to follow if you encounter a case like this.
Step 1: negotiate
Step 2: contact the embassy of the customer’s country
Step 3: claim payment from the insurance company if you have a plan
Step 4: hire an international debt collection agency
Step 5: arbitration
An easier way for you to collect payments
Collecting payments from your customers used to be difficult. Now, there’s a much simpler and easier way for you to collect and receive payments, even if you are dealing with international customers. This also means that you can minimise restrictions for global customers who claim that they are unable to make payments due to failed cheques or bank transactions.
Silverbird offers a smart alternative to traditional banking, which means that you’re no longer tied down to geographical payment methods—you can hold, transfer and exchange foreign currencies for fast and easy cross-border payments with just a single account.
Author: Silverbird Content Team
Illustration: Irina Lisogor