Problems with payments

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Sales aren't everything when it comes to exporting. In fact, exporters often live or die by the ways in which they get paid-or not. There are three main ways a debtor can negatively affect a business: paying late, which compromises cash flow, choosing an inefficient payment system, which eats margins, or not paying at all, from which many small exporters may not recover.

Cash flow stumbles

Christian Vollbehr, member of the management board at global credit insurance agency Coface Deutschland, says that a client may delay payment for a number of reasons, all of which will affect a business' cash flow: "Sometimes they ask for an extension of payment and come up with reasons to delay payment, or they start a commercial dispute used as a delaying tactic." Recent political instability in certain countries will affect payments; even if your customer wants to pay you, they may not have access to their bank because of civil unrest. Whatever the delay, it means export payment terms of 90 days can blow out to months, even years, which severely affects your ability to pay your suppliers and run your business. One remedy, if you've already sent goods overseas and your customer has decided not to accept it at the last minute, is to minimise your losses by selling the goods to another customer nearby. "You need to know at any time where your product is sitting. Is it still on the ship, is it in port? Is it somewhere in transition? Can you redirect it? It's good to know people in-country who can help you on the ground," says Vollbehr. "You could make some losses but you don't lose the ability to trade." For service exports, or if your goods have already been accepted, you can enlist the help of a debt collection agency. Choose one in-country because they will be better equipped to deal with the local laws concerning debt collection. Having a local representative working on your behalf also makes the threat more real for your debtor. Next time, try obtaining payment in advance. "That's the safest way--but you can't usually ask for that for competitive reasons," Vollbehr admits. Also look into secure terms "where you have either documentary credit or any other type of secure terms, like letters of credit that are considered reasonably safe". This depends on the stability of the banking infrastructure in the market, however. "If you have guaranteed payments and the banks shut down, what's the value of that guarantee? There's no 100 percent payment guarantee unless you get money up front." Also check the risk profile of your buyer and the market in case there are environmental conditions that point to future payment problems. "Watch the media to see what's happening. Risk changes every day. If you're setting terms, set them realistically in terms of that market and the industry you're part of," says Vollbehr, adding that competitors may be a good source of this information. He also recommends being strict with your payment terms and keeping track of your debtors. "Keep it alive, update whatever you have."

Marginal losses

Sometimes the system can take a bite out of your profits. Simon Glendenning, general manager for Mid Market-Global Business Payments at global currency network Travelex, says exporters need to be careful about retaining the value of their receipts. This includes managing foreign exchange movements and understanding international payment systems. "At the time they're invoicing a customer, ideally exporters should have budgeted how many Australian dollars they expect to receive back," he says. "Unless they work with someone who can pay them without amounts being taken out by intermediary banks, or assisting them to hedge that payment, everything is left up in the air." A payment system should be transparent in terms of the fees and commissions that may be taken out along the way by various banks and intermediaries, and the speed at which that payment arrives. The fewer networks the payment has to pass through, the more money you'll retain and the faster the payment will be, says Glendenning. "The exporter wants to know if they're getting paid so they can release the goods, the buyer wants them to release goods quickly so they can receive them on time for their own purposes," he says. "Look for things like notification of payments, ease of settlements, and visibility of that information so exporters-as well as those who sent the payment--can actually see the stages of payment." Go with foreign exchange specialists and choose one on the ground in your destination market, he recommends. This means you don't have to rely on banks in other countries that may not be as sophisticated as those in Australia and can enjoy the benefits of transparency and visibility.

The unpaid exporter

Unfortunately, if you've offered credit terms there's always a risk that your debtor won't pay, says Kirk Cheesman, managing director of brokers NCI (National Credit Insurance). He agrees with Vollbehr; most businesses won't have the luxury of obtaining upfront payment to be commercially viable. "To mitigate that, they should be investigating that particular customer or obtaining credit insurance." If you need to check out a potential buyer, there are a number of credit reporting agencies or forensic credit investigators that operate worldwide. You can also see if there are any reputable local agencies that may be able to validate trade references. If this risk mititgation strategy fails, there's always credit insurance, where you pay a premium and the insurer compensates you if the buyer doesn't cough up. Cheesman sees this as a last resort, however. "Businesses are always eager to make a sale and they just need to take the time to think about the risk." he says. "The best way of tackling a potential risk is to put yourself outside your business and say, 'If that debtor was not to pay me for the goods I've sent them, what impact would that have on my business? How would I be able to deal with that?' If that risk is high, you should look at ways of mitigating that risk. My advice is always to micromanage debtors and make sure they know who they're dealing with." And exporters should consider checking every buyer before trading and updating that information regularly, he advises. "There needs to be at least a review on any new customer and an annual review on an existing customer. Market conditions change, currency changes, demand for their product or embargoes and government allowances can change."


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