Need a competitive edge? Consider flexible payment terms
The most common payment terms in international trade are cash in advance, letters of credit, cash against documents and some form of open account.
Flexible payment options help tip sales in your favour
To best manage cash flow and risk, you need to strike a balance
You have to maintain a delicate balance in order to be competitive.
Choosing the right payment option depends on a number of factors
In general, a good beginner’s approach is to offer the payment terms that most companies in your industry use in the local market. The payment option your customers may expect from you can vary from country to country. If you export to the United States, for example, your buyers there will normally pay you using some version of open account, usually net 30 days, and possibly with a discount for early payment.
In Europe and most other foreign markets, however, letters of credit (LCs) are the most common way to handle international payments—although, says van Wolde, that is beginning to change in a few established markets. In the UK and France, for example, some customers are beginning to look for open account terms instead of LCs.
Just because you’ve decided on a certain payment method for one market doesn’t mean you have to offer it for every transaction. If the market is a new one for you, for instance, you may feel it’s too risky to offer an open account. In such cases, you might want to make the initial sale under an LC or a documentary collection arrangement. Later, once you’ve built up a good relationships within your new market, you can consider offering more flexible payment terms.
Even once you have found a good overall balance between risk and payment terms in a particular market, the situation may be different with specific customers.
For example, says van Wolde, “suppose your credit investigations into a prospective buyer reveal a consistent pattern of late payment or other payment difficulties. In cases like that, you’ll be safer asking for cash in advance or a confirmed LC, even if your usual terms for that market might be open account.”
Another factor that can affect your risk appetite and, consequently, your choice of payment terms, is how fast your company is growing: a faster-growing company needs a steady stream of cash flow.
“Let’s say your growth is so aggressive that you need guaranteed cash from your customers as quickly as possible,” says van Wolde. “If you’re in that position, you’ll likely prefer to use cash in advance or ask for LCs. On the other hand, if you have the financial capacity to grow without needing fast infusions of cash, and if you’re also operating in a lower-risk, established market, you may be comfortable with more flexible payment terms.”
