Payment terms as a means of financing your exports
Your financing requirements begin at the time you decide to enter the export market, but the serious financing requirements start once you get the order. The contract that you negotiate with the importer dictates:
- How you will be paid
- When you will be paid
- For what you will be paid
These are referred to as your ‘payment terms’. All of these factors impact on your post-contract financing requirements. Take, for example, if you agree to be paid in 90 days. This will mean that you will not see any money from the buyer for 90 days (and more, bearing in mind the time it takes for the money to reach you). The ‘how’ also affects your financing requirements. As we said before, ‘cash in advance’ is good, while a ‘revocable, unconfirmed LC’ is not so good – this affects your risk of payment and your chances of getting finance from someone such as a bank. Also, what you agree to be paid for affects the financing you require. If you have agreed to provide spare parts as part of this agreement, then it may increase your income, but it also affects the financing you will require. The lesson to be learnt here, is not always to negotiate the biggest contract up front. A smaller contract reduces your risk, financing requirements and may place less demand on your firm and by succeeding with the smaller order, impress the buyer enough to purchase from you again.
Negotiating payment terms
It is highly likely as you become increasingly involved in exporting, that a point will come where you have to negotiate an export sale. During these negotiations, the importer is most likely going to ask you what payment terms you offer. A payment term refers to the way payment will be made as well as the period over which you will allow the importer to pay for the goods (if you offer a period after which the importer can pay, you are in effect extending credit to the importer and instead of using the phrase “payment term”, you could instead refer to a “credit term”).
Such payment/credit terms are important in international trade as they can be used to competitive tool to attract business for your firm, but they can also be used by the importer against you!
You are a risk to the importer
You may think that this is very unfair, but you should also realise that the importer is taking quite a risk buying from you. If your goods are not up to standard and the importer has already paid you, they will have lost out. Once you have received your money, it is very difficult for the importer to exert any influence over you. You may argue that you are a reputable company and that you would never renege on a contract or that you will always provide after-sales service, but the importer may not be willing to take a chance with a company that they do not know and that is also very far away.
If the importer is in a stronger position (i.e. the sale is more important to you than to them), then you may be obliged to offer payment terms. What is more, if payment terms are being offered by your competitor or if payment terms are normal in the industry or country that you are competing in, then may again be obliged to offer such terms.
Know the market before negotiating payment terms
It is important, therefore, before you begin negotiating with the importer, to know exactly what circumstances prevail in the industry or country that you are competing in. Payment terms ranging from 30 to 90 days are quite common in export markets (capital goods tend to attract even longer payment terms, compared with consumer goods). Be very careful when extending longer payment terms, as longer credit periods may increase the risk of default. You should also take note of the fact that most payment terms start only once the goods have been received by the importer. You may therefore have to take into consideration as an additional time period, the amount of time it takes you to produce and ship the goods to the customer.
Always undertake a credit check on the importer
Also you need to be aware of your own importance that you attach to this sale. It would also be worthwhile having undertaken a credit check on the company you plan to do business with. With this knowledge you will be in a better position to decide whether to offer credit or not.
Bear the cost of financing and method of payment in mind
You should also have determined what financing options are available to you and how you intend to receive payment. The cost of financing and the method of payment will impact upon the payment terms you can offer. You should also bear in mind that once credit terms have been extended to an importer, they tend to set a precedent for future sales, so you should review with special care any credit terms extended to first-time buyers.