Reduce Credit Risk Doing Business Overseas

Big or small, if you’re operating a business you’ll know that timely payment is critical to ensuring the long-term security of that business, and keeping it afloat in even the murkiest of waters. Late or non-payment in your own country can put your business at great risk, but that risk is then multiplied when you begin trading internationally. Here we go over how to assess and reduce risk when doing business overseas.
 

Thinking about trading abroad?

It’s tough enough keeping track of clients and ensuring you’re always paid on time, every single time, when you’re dealing exclusively in the United Kingdom. But going over the border sees your business faced with different laws, tax regimes and regulations that can make dealing overseas a potential minefield. And because being paid on time is often crucial to a business’s survival, late payments can have a devastating effect on the running of a business. Interruptions in cash flow can cut back your investments, and even disrupt essential elements such as taxes, salaries and sales. A non-payment scenario is, of course, worse, and many businesses go under every year because of missed or late vital payments from clients which never turn up. 

Now take into account language barriers, geographical distance, and contrasting regulations, culture and legal systems and imagine how those elements can greatly increase your risk factors. Being overseas makes it much more difficult to properly vet your clients before drawing up contracts, and also makes them much harder to chase in the event of late or missed payments. 
How do you guarantee you won’t run into difficulties when trading abroad? Unfortunately, you can’t, but there are a number of steps you can take in order to mitigate some of these risks. Worth a little extra effort? We think so.
 

Assess your risk attached to overseas clients

Let’s start at the very beginning. It’s vital to research the market where you intend to conduct your business, before conducting your business. Are there any warning signs, such as an unstable economic environment, or political instability? How’s the banking system over there? How is the currency doing? Consider the country’s inflation and how all of these factors could affect your business. 

Check to see what international trading agreements are in place between the UK and the overseas market you’re planning to target. Sometimes there are protections in place within these agreements which can be of assistance to you if anything goes wrong.

A good starting place for information is the UK Export Finance service.
 

Check the credit risk for the overseas company you are dealing with

The economic risk is one factor, the other is the credit status and financial trading strength of the company you are dealing with. So next, properly investigate your intended customers or clients. Information on companies overseas is rarely as complete or consistent as the information available on UK companies. Filing requirments are often less stringent, and information can be less detailed. First Report has agents and uses resources worldwide to obtain the most information possible on companies overseas, you can start here with an overseas credit report enquiry.
 

Insurance against non-payment 

Insurance is essential if you’re intending to trade overseas, and will allow for compensation in the event of late or non-payment, therefore minimising your risk. It should be noted here that insurance will up the cost of your products, and it may seem tempting to skip this step altogether – don’t. But do shop around and check out all your options before settling with a reputable supplier who can ensure you have the right amount of cover in the right places.
 

Give crystal-clear payment terms 

Make your payment terms known well in advance to potential clients, and spell these terms out in the simplest form you can, before asking clients to agree in writing before you go any further. This will cover your back in the event of any legal disputes, and will also eliminate some of the common excuses often made for late payments, including ‘misunderstandings’ about when payments are actually due.

Negotiate a payment method with your client before agreeing on terms. There are four possible main ways to schedule payments, but it goes without saying that payment in advance is certainly the best. Upfront payments cover your costs and eliminate any risk of lateness.

Second best is known as a letter of credit, where the client arranges payment via their bank to send to your bank. This may incur a banking commission, but you can practically guarantee a timely payment using this method.

Alternatively, you can request a bill of exchange via your bank, and it will then contact the customer for payment. This is then settled when the goods are satisfied, and in the meantime you’ll retain official ownership while you await payment.

Lastly, you could get an open account, which simply meanings invoicing the client upon completion of the job, stating the terms and hoping they pay before the deadline you’ve given. This is the riskiest option by far.
 

Managing payer performance

A great way to encourage early payment is to provide incentives, such as a discount or special offer on the client’s next purchase. It’s important to ensure your correspondence is clear, so hire a translator if you feel the need to. You could also invest in credit management software, allowing you to keep on top of customer payments and issue reminders if a payment does happen to be late.

All of the above points should be implemented into a payment strategy, along with courtesy calls to check everything is going smoothly, reminder letters, and considerations such as time zone differences and language barriers.

Most companies trading abroad or in their own country will find themselves having to deal with late or non-payments at some point, but building a solid strategy will help ensure prompt payment and reduce risk for your business.

See more credit tips and information.