It is so in exporting, that you do not always get paid once you deliver the goods to the buyer. The reason for this is that you have agreed to give your buyer some credit terms. Credit terms means that you are allowing the importer to pay you only after a certain period of time – say 30 or 60 days. As you either have to borrow money to finance this ‘gap’ before you get paid, or even if you do not need any financing, you could still have earned interest from this outstanding payment and you are foregoing an opportunity cost in providing this credit. Either way, the credit that you offer your foreign buyer has a cost attached to it and you need to take this cost of credit into consideration.

Not all payment methods have a credit cost

We have said that there are four main ways of receiving payment, namely; cash in advance, letter of credit, documentary collection, and open account. Clearly, cash in advance has no credit associated with it. The other three ways of receiving payment might well have a credit period associated with them. For example, the L/C may stipulate that payment is only in 30 days or, similarly, with an open account, you may agree that the customer pay you only after 30 days following your presentation of the invoice (and so is the case with documentary collections).

Even when you get paid on demand, there is still a credit period involved

Bear in mind that even if you have agreed with the buyer to be paid on presentation of the L/C, bills of exchange or invoice, payment is seldom instant. The banking system is slow and even with the quickest bank transfer method (using SWIFT, for example), you may only receive payment after a few days. What is more just getting the documents to the bank to effect payment may take a day or two (and there may be holidays and other gaps inbetween). What we are saying is that even in the case of payment of demand, the money may take a week or more to arrive and if the amount involved is high, you may still face a substantial interest payment (or interest loss).

Get your paperwork done quickly and accurately

One of the major problems exporters face when receiving payment is that the documentation they submit is incorrect and payment is consequently withheld until the errors have been corrected (and this may take some time). For this reason, it is imperative that you ensure that all the documentation that you submit to effect payment is perfectly correct (even a spelling mistake or punctuation mark could delay payment). Secondly, the quicker you get the paperwork to the bank or to the importer, the quicker you will be paid. Make sure that you follow up with the submission of your payment paperwork as quickly as possible.

Incorporate the credit cost into your pricing

It basic business principles to ensure that any credit cost (whether you are paying to get credit or are loosing out on interest that could have been earned) be incorproated into your pricing calculations. Not to do so, will lead to failure quite quickly. Click here to revisit the pricing process and to see where the credit costs fit in.

Assess your credit risk

Of course, there is always the chance that the importer will not pay you, or, even if the importer is willing to pay you, he/she cannot because of a problem outside of their control. such as or some other political problem that has arisen. It is important, therefore, for you to assess the risks associated with your giving of credit. These risks may be commercial risks associated with the buyer’s ability to pay, or political risks associated with a shortage of foreign exchange, the rescheduling of debts, the outbreak of war, or the implementation of sanctions in the importer’s home country.

How do I reduce my risk?

If you face the problem of credit risk, don’t panic; there is something you can do about it. You can approach a professional credit insurance company to insure against the risk you face. Of course, you will need to approach a company that specialises in export credit insurance. There are several organisations that provide export credit insurance, these include: