Chapter # 9 : Risks and Payments in International Business
Q: How do I make sure to get paid in the foreign country?
A: There are different payment methods and different cultural practices that guide when and how payments are made. The range is from payment in advance to sending products on consignment. The first very safe, and consignment gives very little security. You can also provide open credit, factoring, Cash Against Document, Documents against Acceptance, Letter of Credit and different types of bank guarantees. There are many banks and government programs that can insure your payments. You have to select what is most appropriate for the client and country. Note, however, that a very secure payment may be good for you but could limit your distributor’s expansion (reducing their cash flow). You have to evaluate which best suits each. Don’t assume you can use the same method, in a new country as at home. Investigate what is used in that specific country.
Q: Is a Letter of Credit (L/C) a good payment method?
A: Yes and no. It is a safe way to get paid if it is the right type of LC, issued properly and the rules are followed according to the contract. However, it is limited in its flexibility and costs for both parties money. It is normally recommended for larger shipments, especially if there is a long time between order and shipment. If the local payment methods are questionable, you will want an irrevocable letter of credit payable at your bank.
There is also a revolving Letter of Credit allowing for continuous shipments. If the supplier does not completely comply with the LC, it is worth nothing. If you ship more or even less than the LC stipulated, it is considered void. If the LC states no transshipments and you do not follow that rule, the LC will be void.
Q: How does Cash Against Document (CAD) or Documents Against Payment (D/P) work, are there any drawbacks?A: Cash against document means that you ship the goods to the foreign country. The documents (Bill of Lading and invoices) are sent to your client’s bank. The client must pay for the goods before the documents are released. This will work in countries where you can trust the banks. The advantage is that the client does not get access to the goods without paying. The drawback is that if they change their mind and do not want the goods, you have to bring them back and pay for the shipping.
Q: What currency should I use when exporting?
A: You would most likely want to get paid in your own currency. However, the local distributor wants to buy in their currency. Make the price list in their currency if they have a steady and acceptable currency, like the EURO, British pound or US$. If the country does not have a stable currency, like Russia and Zimbabwe, use a neutral currency like the US dollar.
Q: How do I make sure I don’t lose money on currency fluctuations?
A: Let’s assume you are a US company and invoice in EURO. There are several ways to make sure you would not lose too much money.
- You could put some buffer in your pricing for currency fluctuations.
- You can borrow the same amount in the foreign currency. Then, it would not matter what happens. If the EURO goes up, you will get more dollars but your loan has also increased and vice versa.
- You can “insure” your currency. Let say your invoice of 200,000 EURO will mature on July 16. You can go to the bank and make a deal.
- You buy an option for the exchange rate of 200,000 EURO and the bank will give you a rate. On July 16, if the EURO has gone down in value, you use your option to convert the EURO to US$. If the EURO has increased in value, you just convert the currency and keep the difference
- You can buy a term. That is the same as the option. The only difference is that you have to convert the currency at the specified price and fulfill the contract.
I am sure that your bank will be more than willing to discuss the different options with you.
Leif Holmvall, President
Export Pro Inc.
In our book “Export & Import – Winning in the Global Marketplace”
ISBN 978-0-9681148-1-0 those topics are covered in depth. You can also buy our book for less than $10 as an e-book visit e.g. https://www.amazon.com/dp/0968114814, where you can read part of the book.
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