Extending CreditExtending Credit to Foreign Buyers
Foreign buyers often press exporters for longer payment periods. Although it is true that liberal financing is a means of enhancing export competitiveness, it is important to carefully weigh the credit or financing you extend to foreign customers. Moreover, the extension of credit by the seller to the buyer is more common outside the United States. U.S. sellers who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors. One useful guide for determining the appropriate credit period will be the normal commercial terms in your industry for internationally traded products.
Buyers generally expect to receive the benefits of such terms. For off-the-shelf items like consumer goods, chemicals and other raw materials, agricultural commodities, and spare parts and components, normal commercial terms (with few exceptions) range from 30 to 180 days. You may have to make allowances for longer shipment times than are found in domestic trade because foreign buyers are often unwilling to have the credit period start before they have received the goods. Custom-made or high-value capital equipment may warrant longer repayment periods. Once credit terms have been extended to a buyer, they tend to be a precedent for future sales, so you should review with special care any credit terms contemplated for first-time buyers.
When exporting, your company should follow the same careful credit principles it follows for domestic customers. An important reason for controlling the credit period is the cost incurred through use of working capital or through interest and fees. If the buyer is not responsible for paying those costs, then you should factor them into the selling price. Your company should also recognize that longer credit periods may increase the risk of default. Thus, you must exercise judgment in balancing competitiveness against cost and safety. Customers are frequently charged interest on credit periods of a year or longer, this happens less frequently on short-term credit (up to 180 days). Most exporters absorb interest charges for short-term credit unless the customer fails to pay until after the due date.
Obtaining cash immediately is usually a high priority with exporters. Converting export receivables to cash at a discount with a bank is one way to achieve this goal. Another way is to expand working capital resources. A third approach, suitable when the purchase involves capital goods and the repayment period extends a year or longer, is to arrange for third-party financing. For example, a bank could make a loan directly to the buyer for the product, and you could be paid immediately from the loan proceeds while the bank waits for payment and earns interest. A fourth possibility, sometimes suggested when financing is difficult to obtain, is to engage in countertrade: that is, to accept goods, services, or other instruments of trade in partial or whole payment for the product. Countertrade, thus, provides the customer with an opportunity to generate earnings to pay for the purchase.
Some options may require you to pay interest, fees, or other costs. Other options are only feasible for large transactions. Your company should also determine whether it will incur financial liability if the buyer defaults.
A fourth possibility, sometimes suggested when financing is difficult to obtain, is to engage in countertrade: that is, to accept goods, services, or other instruments of trade in partial or whole payment for the product. Countertrade, thus, provides the customer with an opportunity to generate earnings to pay for the purchase.
Some options may require you to pay interest, fees, or other costs. Other options are only feasible for large transactions. Your company should also determine whether it will incur financial liability if the buyer defaults.
| Know the options—some work well for small sales, but others are only available for large transactions. |
When exporting, your company should follow the same careful credit principles it follows for domestic customers. An important reason for controlling the credit period is the cost incurred through use of working capital or through interest and fees. If the buyer is not responsible for paying those costs, then you should factor them into the selling price. Your company should also recognize that longer credit periods may increase the risk of default. Thus, you must exercise judgment in balancing competitiveness against cost and safety. Customers are frequently charged interest on credit periods of a year or longer, this happens less frequently on short-term credit (up to 180 days). Most exporters absorb interest charges for short-term credit unless the customer fails to pay until after the due date.
Obtaining cash immediately is usually a high priority with exporters. Converting export receivables to cash at a discount with a bank is one way to achieve this goal. Another way is to expand working capital resources. A third approach, suitable when the purchase involves capital goods and the repayment period extends a year or longer, is to arrange for third-party financing. For example, a bank could make a loan directly to the buyer for the product, and you could be paid immediately from the loan proceeds while the bank waits for payment and earns interest. A fourth possibility, sometimes suggested when financing is difficult to obtain, is to engage in countertrade: that is, to accept goods, services, or other instruments of trade in partial or whole payment for the product. Countertrade, thus, provides the customer with an opportunity to generate earnings to pay for the purchase.
Some options may require you to pay interest, fees, or other costs. Other options are only feasible for large transactions. Your company should also determine whether it will incur financial liability if the buyer defaults.
A fourth possibility, sometimes suggested when financing is difficult to obtain, is to engage in countertrade: that is, to accept goods, services, or other instruments of trade in partial or whole payment for the product. Countertrade, thus, provides the customer with an opportunity to generate earnings to pay for the purchase.
Some options may require you to pay interest, fees, or other costs. Other options are only feasible for large transactions. Your company should also determine whether it will incur financial liability if the buyer defaults.