Research overseas customers' and markets' creditworthiness
In this guide:
- Getting paid when exporting
- Research overseas customers' and markets' creditworthiness
- Payment terms for overseas customers
- Receiving payments from overseas customers
- Assess the risk level for overseas payments
- Managing your overseas customers' payment performance
- Insurance against non-payment by overseas customers
Research overseas customers' and markets' creditworthiness
Political, economic, currency exchange and banking issues to consider.
To minimise the risks of non-payment, you should research the market conditions in your target country and the credit worthiness of potential customers before you start trading.
Understand country risks
Start by building an overall picture of payment practices in your customer's country:
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The political situation - war, civil unrest, corruption or security issues might affect payments. Changes in government could lead to embargoes or the introduction of tariffs.
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The economic situation - stability and sustained growth in the local economy will mean more potential customers are solvent. Check there are no problems with the supply of money in your target market.
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Foreign exchange and banking conditions - you will be exposed to foreign exchange fluctuations when selling overseas unless your customer agrees to pay in sterling, thus taking on the risk. An historically stable currency will minimise your risk. Read more about foreign currency and exchange risks. Check the stability of the banking sector - this can affect the efficiency and speed of your receiving payment. Find banking and other business information in your target market.
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The UK's relationship with the target market - what are the prevailing conditions? For example, are specific trading agreements in place?
Read coface reports on the creditworthiness of countries.
Read more about researching and entering overseas markets.
Understand buyer risks
You will need to assess your potential customer's financial position and trading record to limit the possibility of non-payment. The most common causes of non-payment are the buyer becoming insolvent or simply refusing to pay.
It's essential to carry out a credit check on potential overseas customers. This will indicate how they have kept up with their liabilities in the past.
Invest Northern Ireland can provide a range of support services to businesses thinking about investing overseas.
UK Export Finance also provides help to exporters through its Export Credit Insurance scheme. New exporters can contact the UK Export Finance Enquiry Line on Tel 020 7271 8010.
The Authorised Economic Operator (AEO) certification scheme is aimed at reducing security risks in your supply chain as businesses registered as AEOs will have undergone checks on their commercial and financial management record.
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Payment terms for overseas customers
Learn about the main transaction types for overseas customers.
There are four main transaction types for overseas customers.
Transaction type Description Payment in advance This involves taking payment before dispatching goods and means you bear no risks or financing costs. You might use it when you have concerns about a customer's ability to pay. However you should be aware that very few trade customers will agree to pay in advance. Documentary credits Known as letters of credit, this is one of the safest ways to get paid by overseas customers. Your customer arranges a letter of credit with their bank, which pays a bank in the UK once you complete the necessary paperwork, the goods have arrived at their destination city, and the documents are accepted without any discrepancies.
If your documentation is accurate, you are guaranteed to be paid on time. Your customer bears the cost of issuing the letter of credit. You will have to pay commission to your bank.Documentary collection In this system, payment becomes due when your customer accepts ownership of your goods. You instruct your bank to draw up a bill of exchange, which allows you to keep control of your goods. An overseas bank, acting for your bank, will release the documents allowing your customer to take the goods once they accept the terms of the bill.
There is a risk that the bill of exchange will not be accepted, but you retain ownership of the goods - although they'll be in your customer's country. There is still a risk of non-payment unless your bill of exchange has been guaranteed by the bank. You will have to pay commission to your bank and the overseas bank.Open account This is similar to offering credit to a UK customer. You supply the goods and invoice the customer, stating when you expect to receive payment.
This option has the highest risk of non-payment. You will bear the costs of production and shipping until you are paid. However, there are no other costs except ordinary freight costs and other overheads. You should only use open accounts when you have an established relationship with your customer and are confident they can pay.
Choosing your payment optionsConsider your customer's creditworthiness, trading conditions in your customer's country and your business' financial strength. Ensure you research overseas customers' and markets' creditworthiness and consider how to assess the risk level for overseas payments.
You should also consider currency choice and payment methods.
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Receiving payments from overseas customers
Interbank transfers, buyer's cheques, banker's drafts, international money orders and debit or credit cards.
There are two key issues when receiving payment from overseas customers - the currency in which you will be paid and the method the customer will use to make payment.
Currency issues
Most customers will prefer to be invoiced and pay in their local currency. You may lose business if you insist on being paid in sterling.
However, accepting foreign currency will result in additional costs for your business. There will be a transaction cost for converting the payments into sterling. You also carry the risk of the currency devaluing between the time you supply the goods and when you are paid for them.
Read more about foreign currency and exchange risks.
Payment methods
There are four main payment types:
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Interbank transfer - your customer pays directly into a bank account that you nominate. This is standard practice in many countries.
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Buyer's cheque - a cheque payable to you drawn against your customer's account. Accepting cheques from buyers can be risky - they can bounce or be lost in transit. The payment will also need time to clear.
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Banker's draft - a cheque payable to you drawn against your customer's bank rather than their account. These provide more security than buyer's cheques but the bank will usually charge your customer to provide a banker's draft. They can also be lost in transit.
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International money orders - documents that can be exchanged for cash in the supplier's country via a Post Office or through an issuer's office. They are cheaper to obtain than banker's drafts but can be lost in transit.
Discuss the options with your customers and make the agreed payment methods clear in your trading agreements.
Debit and credit cards
Customers may offer to pay using credit or debit cards. While this can prove a fast and convenient way of receiving payment, there is a risk that the charge may be disputed by your customer and reversed.
Pay careful attention to the terms and conditions of your merchant account to minimise the risk.
Read more about using payment cards to buy and sell goods or services.
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Assess the risk level for overseas payments
Risk analysis and payment terms when selling overseas.
To decide which payment terms and payment methods to offer overseas customers, assess the level of risk that trading with them will entail.
You should research the market and the local trading conditions, including the economic and political situation, for an overall picture.
You can then make an informed decision about the level of risk you're prepared to accept, and how to manage it.
The risk ladder
To find appropriate payment terms with overseas customers you need to balance your risks against customer requirements and expectations. What is more secure for you is more risky for them - and vice versa.
The principle is described in a 'risk ladder':
Exporter Importer Least secure Open account Most secure v
vDocumentary collection ^
^Documentary credits Most secure Payment in advance Least secure
Most international trade transactions are carried out in the middle of the ladder - balancing the risks of the seller with the needs of the customer.Which payment terms to use is a key decision when starting to trade overseas. Get advice if you are unsure. Find out about the Invest NI support for selling outside Northern Ireland.
The International Chamber of Commerce has established rules governing documentary credits worldwide. The Uniform Customs and Practice for Documentary Credits (UCP600) is a set of internationally accepted rules on the issue and use of letters of credit. These rules are commonly used by banks in commercial transactions worldwide. As they are incorporated into contracts voluntarily, the rules are flexible, but once applied to any documentary credit, they are binding on all parties to the credit, unless specifically modified or excluded by the credit.
You should use Incoterms, an internationally agreed set of delivery contract terms, in all your contractual agreements with overseas customers to avoid confusion and legal disputes. But remember that Incoterms cover your delivery terms only - they do not cover payment arrangements
You should also consider arranging insurance against non-payment.
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Managing your overseas customers' payment performance
Credit control and keeping on top of overseas customer debt when exporting.
You need to have efficient credit control procedures when selling overseas. Payment for most export transactions takes time, and you will have to finance your export activities until you are paid.
Many processes and best-practice principles for effective overseas credit control, such as offering discounts for prompt payment, are the same as in your home market. Read more about managing late payment.
Specific considerations for exporters
Ensure you have the skills and manpower to run an effective credit control operation for overseas customers.
Key issues include:
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Language. Can your staff communicate with overseas customers? If not, chasing payment can be difficult.
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System knowledge. Payment terms, such as letters of credit, can be complex. Do your staff have sufficient training?
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Time zones. When trading overseas, your customers' working hours may differ from yours. Could you arrange to contact them in their working hours?
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Communications infrastructure. How strong is the communications network in your customers' country? What are the implications for speed of communication and payment?
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Cost. Chasing overseas debt can be time-consuming and costly. Have you got the resources to fund this?
Outsourcing credit control
If you are not confident about managing your own credit control procedures for overseas customers, or do not have the resources, you can outsource them.
Managed credit insurance schemes will obtain country information, check customer details, set credit limits and chase overseas payments for you. You will have to pay for this service, usually as part of a premium for credit insurance cover. Read more about insurance against non-payment by overseas customers. Some banks also offer this service for a fee.
You could also sell your invoices to a debt-factoring house, which will take on the work of recovering the payments. You can also raise money through invoice discounting, but you remain responsible for recovering the debt. Read about the basics of factoring and invoice discounting.
Non-payment
If you are not paid and the relationship with your customer breaks down, you should consider claiming on your insurance. Most insurance protecting against non-payment from overseas customers is tailored to suit your business. You can choose to cover your entire overseas turnover, specific customer debts or single large contracts.
Alternatively you may wish to use a debt collection agency to pursue the debt.
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Insurance against non-payment by overseas customers
Commercially available cover and government-supported insurance for exporters.
It's a good idea to consider insurance against non-payment by overseas customers. Exporting can restrict your cashflow and a delayed or lost payment can have serious consequences. Getting the right insurance can help minimise the impact if problems occur.
You will need to factor the cost of insurance into your pricing. While this may make your price higher, if you are concerned about non-payment it could be a false economy to discontinue your insurance in order to make your pricing more competitive.
The form of insurance will depend on the type and value of business you are conducting overseas. Payment insurance is only one form that you should consider to protect your interests. Read more about insurance for international trade.
Commercially available insurance
This is available for all exporters who export goods or materials on cash or credit terms of up to two years. There is a variety of cover options available, from coverage for all export activities through to one-off transactions. It's a good idea to shop around as the sector is quite competitive.
Find a financial export credit insurer.
Government-supported insurance
To complement cover available from the private market, UK Export Finance - the UK's official export credit agency - offers a range of products and services. These include export insurance policies for contracts to a value of at least £20,000 typically involving the export of capital equipment and project-related goods and services. If your contract is not for semi-capital or capital goods and related services, you must first attempt to purchase insurance from a private export credit insurer before you apply to UK Export Finance.
To find out whether your business is eligible for export insurance, you can call the UK Export Finance Enquiry Line on Tel 020 7271 8010.
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