Prudent Credit PracticesPrudent Credit Practices
Experienced exporters extend credit cautiously. They evaluate new customers with care and continuously monitor existing accounts. You may wisely decide to decline a customer’s request for open-account credit if the risk is too great, and you may propose instead payment-on-delivery terms through a documentary sight draft or an irrevocable confirmed letter of credit—or even payment in advance. For a fully creditworthy overseas customer, however, you may decide to allow a month or two for payment or perhaps even to extend open-account terms.
Other good credit practices include being aware of any unfavorable changes in your customers’ payment patterns, refraining from going beyond normal commercial terms, and consulting with your international banker on how to cope with unusual circumstances or in difficult overseas markets. It is always advisable to check a buyer’s credit (even if the safest payment methods are used). A U.S. Commercial Service International Company Profile (ICP) provides useful information for credit checks (see Chapter 6). For a fee, you may request an ICP on companies in many countries. The ICP contains financial background on the company and gives not only its size, capitalization, and years in business, but also such additional pertinent information as the names of other U.S. companies that conduct business with the company in question. You can then contact those U.S. companies to find out about their payment experience with a given foreign company.
Because being paid in full and on time is of the utmost concern, the level of risk you are willing to assume in extending credit in global markets is a major consideration. There are several ways in which you can receive payment for products sold abroad; your choice will depend on how trustworthy you consider the buyer to be. With domestic sales, if the buyer has good credit, sales are typically made on open account; otherwise, cash in advance is required. For export sales, five other methods of payment are also common. Listed in order from most secure for the exporter to least secure, the basic methods of payment are:
Other good credit practices include being aware of any unfavorable changes in your customers’ payment patterns, refraining from going beyond normal commercial terms, and consulting with your international banker on how to cope with unusual circumstances or in difficult overseas markets. It is always advisable to check a buyer’s credit (even if the safest payment methods are used). A U.S. Commercial Service International Company Profile (ICP) provides useful information for credit checks (see Chapter 6). For a fee, you may request an ICP on companies in many countries. The ICP contains financial background on the company and gives not only its size, capitalization, and years in business, but also such additional pertinent information as the names of other U.S. companies that conduct business with the company in question. You can then contact those U.S. companies to find out about their payment experience with a given foreign company.
Because being paid in full and on time is of the utmost concern, the level of risk you are willing to assume in extending credit in global markets is a major consideration. There are several ways in which you can receive payment for products sold abroad; your choice will depend on how trustworthy you consider the buyer to be. With domestic sales, if the buyer has good credit, sales are typically made on open account; otherwise, cash in advance is required. For export sales, five other methods of payment are also common. Listed in order from most secure for the exporter to least secure, the basic methods of payment are:
- Cash in advance
- Letters of credit
- Documentary collections
- Open account
- Consignment