How to ensure prompt payment when selling overseas

Timely payment is essential to the long-term security of your business but the risks of late or even non-payment can be that much greater when doing business internationally. Business Editor Dan Matthews looks at how to assess the risks.

Making sure you are paid on time, every time, is a hard-enough proposition when you sell exclusively in the UK. But break through the border and you’ll encounter new laws, tax regimes and ways of doing business that could make it even trickier. As every business owner knows – some to their cost – being paid on time is one of the most important aspects of running a business. For organisations that are not paid at point of sale, every job is an investment of materials and labour on which they must see a return.

Late payment affects the smooth running of your business because cashflow interruptions can disrupt investment plans and, in the worst case scenario, inhibit spending on everyday business essentials such as salaries, taxes and sales. For obvious reasons, non-payment is even worse. Hundreds of UK businesses go bust every year because they rely on a client or selected clients for vital payments that never materialise. For reasons including geographical distance, language barriers, contrasting legal systems and culture, selling overseas can increase the risks of late or non-payment. It’s harder to vet clients before contracts are drawn up. It’s also harder to chase them after the event.

However, there are a number of things you can do that mitigate these risks and while it is impossible to completely erase the chance of encountering payment problems, a little extra effort means the impact of any potential problem is greatly reduced.

Assess the risk attached to your overseas clients

A vital starting point is to research the market in which you are planning to do business. Take into consideration clear warning signals such as political instability, a turbulent economic environment and an immature or unreliable banking system. Then there are less obvious signs that nevertheless could foretell a problem in future. Consider the country’s currency and whether it is stable or volatile. In real terms, you could be paid a lot less than agreed if inflation is a problem in the country.

Also check for international trading agreements between the UK and your target market – these offer some protection if a deal goes wrong. Next, investigate your potential customer or client. What is their creditworthiness and do they have a long and stable trading record? Do a credit check and if possible investigate the directors too. If they have failed businesses in their history, ask why.

Insurance against non-payment 

Insurance is another prerequisite for companies trading overseas. This will compensate you for late or non-payment and will therefore minimise the risk of your overseas operations harming your organisation generally. Insurance will push up the cost of your products, but don’t be tempted to skip it as the cost of non-payment is much higher. Consider your options, choose a reputable supplier and make sure you have the right level of cover in the appropriate areas.

Give crystal-clear payment terms 

Avoid confusion by spelling out your payment terms well in advance and asking your customers to agree to them in writing. This will help you in a legal dispute, but it also erases some common excuses for late-payment, such as ‘misunderstandings’ over when payment is due.

Before you agree terms, negotiate how your customer will pay. There are four main ways in which you can schedule payment and the first is the best: payment in advance does exactly what it says in the tin. You get paid upfront before you ship the goods or carry out the contract.

Then there is a letter of credit, in which the customer arranges with their bank to send payment to your bank. This usually means paying a banking commission, but timely payment is practically guaranteed.

You can ask your bank to create a bill of exchange, which it sends to the customer for payment. They settle when the goods or services are satisfied and you retain official ownership of them until payment is made.

"Insurance will push up the cost of your products, but don’t be tempted to skip it as the cost of non-payment is much higher."

The final method is via an open account, which simply entails invoicing the customer once the job is complete. You state the terms and (you hope) they pay on or before the time period has elapsed. There are no costs associated with this method, but it can be risky without precautions.

Managing payer performance

Providing incentives for early settlement – even a discount – is a great way to encourage payment sooner rather than later. Make sure all of your correspondence is clear and accurate (especially if translated from English). You may also want to invest in credit management software, which will help you keep track of customers’ payment records and issue automatic reminders if payment is not forthcoming.

It pays to build all of the above into a ‘payment strategy’, involving calls before the payment deadline to enquire whether all is running smoothly, prompt reminder letters and even personal visits from senior staff if problems reoccur. Don’t forget to take into consideration the language barrier, time zone differences (are you sending emails at 2am their time?), staff training, communication infrastructure within your business, and the overall cost of chasing payments halfway around the world.

Most companies, whether they trade abroad or not, will encounter late-payment or non-payment sooner or later. Putting in place a hard and fast strategy for promoting prompt payment, and for dealing with late payers when they crop up, will mean that the impact on your business is lighter than it might have otherwise been.

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John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK