This is part 2 of the 4 part series on “How YOU Can Grow Your Business Internationally”. In this segment you will get some tips on how to get started and the range of payment options that are available to you.
Taking the plunge
Now that you have verified that your company is “in control” of its customer credit risk, you are ready to consider expanding your sales to markets to other countries. The U.S. Department of Commerce is a great place to start. They can provide expert assistance in helping you find and exploit new markets. One of the very valuable services they provide is that they can put you in touch with the U.S. Embassy in any country you may be interested in. The Embassy can help you identify specific markets within the country that have the greatest potential for your products and they can help you establish a presence there. There are many other sources of help as well. In the state of Arizona, for example, the Arizona Commerce Authority, a non-state government entity, is a great source of assistance.
How would I get paid?
A question that typically comes up whenever I speak about sales & marketing opportunities outside the United States goes something like this: “How can I be sure that I will get paid by someone half way around the world (or even just North or South of the border)?” That’s a good question and the answer is that there is a wide range of ways in which a business can be paid by a foreign buyer. Here are the primary methods listed in increasing order of risk to the seller and decreasing order of risk to the buyer:
- Cash in Advance: The seller prefers this method to because it enables him to pay suppliers & labor and limits the necessity of borrowing. The buyer, of course, sees this as most risky. This method can include such things as: COD, Payment Prior to Shipping, Payment Prior to Production, International Money Orders, International Wire Transfers and Online Payment Services.
- Letter of Credit: With this method the seller grants credit to the buyer in a process that ensures that the seller’s product is not released to the buyer until the obligation is settled. The transaction utilizes banks at both ends to effect the transaction; and, the bank at the buyer’s end should be approved in advance by the seller. In essence the seller’s bank is conducting the transaction with a bank on the buyer’s end and that bank is then responsible for collecting from the buyer.
- Documentary Collections / Bills of exchange: These are essentially promises to pay that are drawn on a bank. In one case the obligation to pay is effective upon acceptance of the documents associated with the shipment. Or, documents may be released when the buyer signs the ‘Bill of Exchange’ indicating acceptance of payment terms.
- Open Account: This is the riskiest form of payment to the seller but the most preferred by the buyer because he wants time to receive, store & distribute goods and, to collect his receivables before meeting his obligation on this debt.
More about the Letter of Credit (LOC)
Since Letters of Credit are so common, you might be interested to know a bit more about them.
A letter of credit (LOC), also known as a documentary credit, is a negotiable document obtained by a buyer from a bank (typically in the buyer’s country) to provide payment security to a seller (the creditor). Before a bank at the buyer’s end will issue a Letter of Credit it receives a fee from the buyer. The fee may be all or part of the amount of the sale but, either way, the issuing bank is responsible for fulfilling the full value of the Letter of Credit. The LOC has three parties; the buyer, the issuing bank, and the creditor (also known as the seller or beneficiary).
A Letter of Credit enables the seller to get paid in the event of a default by a buyer. Because the seller is paid by a bank, the seller is not affected by a buyer’s insolvency or bankruptcy. Nor is the issuing bank (at the buyer’s end) affected or influenced by any disputes between the buyer and seller. The seller may draw on the LOC at any time with a demand for payment as long as all the documentation required by the LOC can be provided to the bank.
Letters of credit may be used for one time transactions, particularly international transactions. These are called Commercial Letters of Credit (CLC).
Letters of Credit may also be used as an escrow substitute for a series of transactions and are then referred to as “Standby Letters of Credit”.
Letters of Credit are covered by the Uniform Commercial Code (UCC) in the United States and by; the International Chamber of Commerce (ICC), the Uniform Customs and Practices for Documentary Credits (UCP), and the International Standby Practices (ISP98).