What’s the biggest risk in addressing overseas payments? When partnering with a bank to make overseas payments, what’s the blueprint for companies? Is cash in advance a viable payment option? These and other frequently asked questions related to how U.S. companies should pay overseas suppliers are addressed here.
1. For U.S. companies doing business overseas, what are the biggest risks in addressing overseas payments?
Not getting paid. If you are a small business, selling a customer $50,000 worth of goods is a sizable amount and can be a big hit on small business, enough to take it down if it doesn’t get paid.
Paying a customer too soon. This method does not allow any recourse should something go wrong (e.g., quality of the product is poor, missing a deadline for delivery in time for a seasonal event, etc.).
2. When partnering with a bank to make overseas payments, what’s the blueprint for companies? What steps are the most important?
Ask a lot of questions – leave no stone unturned when it comes to what you are thinking. Share your worse nightmare and best-case scenario. Begin with the end in mind: What are you trying to accomplish? For example, that can be anything from delaying payment for as long as possible (120-day payment plan instead of at sight, for instance) to structuring one big transaction with payments throughout the year that are continent upon certain trigger events. Your bank should serve as an expert to you and provide the pros/cons on each transaction and emphasize the risks to the type of payment plan you desire. It should also provide creative financing alternatives that it might not be able to offer but can assist in brokering a deal through another party. Lastly, your banker should be knowledgeable about all the alternative financing programs available.
For my clients, it depends on a lot of factors. Reverting to No. 2, I ask my clients a lot of questions to determine what they want to accomplish and that leads to the best payment vehicle. I also urge my clients to consult with their banker. Many clients, on the importing end of transactions, want to delay payment for as long as possible to have a chance to sell the goods they are importing and thereby leverage use of their own money for as long as possible too (earning interest, hedging against currency fluctuations, etc.).
In the case of getting paid, of course, the opposite occurs. Most North American clients want to get paid as soon as they release goods from their factory door. It all gets down to what you can negotiate with your customers that is fair and is a win-win for both parties. The last thing a company should do is negotiate a deal with only their own needs in mind because that leads most often to no deal.
4. How should North American companies doing business overseas account for key payment issues like Value Added Tax (VAT), foreign currencies (e.g., how overseas firms want to get paid) and time/payment delays when exchanging money or payments? Is that the bank’s responsibility or the company’s responsibility?
All of this can be controlled by the seller (exporters) provided the buyer agrees to terms and conditions. For example, a seller can say it only sells in U.S. dollars and will quote on the basis of official Incoterms, according to the International Chamber of Commerce, because these terms have become an essential part of the daily language of trade. They have also been incorporated in contracts for the sale of goods worldwide. These terms of shipment will affect the final numbers on an export quotation as well as your financial responsibility for the shipment. For example, CIF means you are responsible for paying the cost, insurance, and freight (CIF) costs in advance to a name overseas port. You will collect these later, at the point when you invoice your customer.
5. Any tips on letters of credit payments?
These can be time-consuming and more costly than, for example, a wire transfer. However, after payment in advance, securing payment with a Letter of Credit (L/C) is the next best option. There are a variety of L/Cs available - irrevocable, revocable, sight draft, payment timetables, and time-draft, for example. And then there are special types of L/Cs - transferable, assignment of proceeds and revolving L/Cs.
For brevity sake, my only tip is this: Ask your bank if it will email or snail mail you its international banking directory at no charge. Nearly every large bank publishes one. It’s usually a slim volume but as good as a fat encyclopedia for showing you every imaginable way to finance an export sale. Such a directory can be very useful for reference should your customer ask you a technical question about how her financing will work.
6. Is cash in advance a viable payment option? Again, what is the paying company’s role and what is the bank’s role?
Yes. It’s the best payment option for the seller because you can prevent possible collection problems and you have immediate use of the money. Find out what your bank charges to receive funds via wire transfer. The buyer is responsible for the full risk of the financial transfer. It is based, of course, on the seller issuing appropriate documentation, such as a commercial invoice, shipping documents, etc.
7. What other overseas payments work best for North American companies? Why?
Besides attempting the tried-and-true payment collections, it depends, as stated earlier on a variety of factors - from the size of the transaction to the final destination, especially if the final destination is risky to enter or banking measures are close to none. For example, let’s say a payment cannot be made in a safe, secure and formally authorized manner to a particular country. All that has to be analyzed well in advance of a sale. For example, escrow services allow both exporters and importers to protect a transaction by placing funds in the hands of a trusted third party that collects, holds and disburses funds until a specified set of conditions is met by the instructions of the exporter or importer.
The point is, if one has exhausted all means for collecting payment, there are other means – noncash payment considerations – to finance an import, such as countertrade, bartering or consignment. Regardless of payment method, it’s important to try to keep the international payment process simple.
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