Exporting Blog Series: Payment
Andy Reinke – One of the most frequent questions I’m asked when discussing export development with small Indiana companies, centers on payment. ‘How do I get paid? Are open terms standard for export? Is there any way to guarantee payment? How to hedge against currency fluctuation, should non-dollar denominated payment be requested? And the list goes on.
I think fear over non-payment, and perceived inability of the would-be exporter to seek remediation over nonpayment is one of the biggest hurdles to small US firms to considering pursuit of the foreign market. It needn’t be this complex or vexing.
Review, selection and use of a variety of export finance instruments are well worth the time, and it begins with your present banker – the financial institution in which you’ve already invested your company’s trust. If they don’t have the answers in-house to address international trade concerns, seek another bank – it’s that simple. The bank in question should know about how to execute letters of credit, be able to review the documents and proposed LC’s as they come across your desk to offer advice, and ideally have corresponding relations with banks in the foreign markets you’re targeting. Too, your bank should have a Swift code – a code that is recognized and identifiable world-wide to accept and make international wire-transfers. I say this now knowing some banks do not have such identification.
One such instrument for export is exports receivables insurance which is offered by several firms in the US in addition to the federal government. Exports receivables insurance is aptly named…an instrument that guarantees, assuming certain pre-qualifications of both foreign buyer and exporter, that payment will be forthcoming even if buyer fails to pay or the country to which the goods are exported suddenly enters financial or political turmoil. This instrument costs, but is less pricey and less arduous than the standard LC. However, due to the recent global financial crisis, pricing by for-profit export receivables insurance firms has sky-rocketed and is often unattainable or unwise for small firms to engage. EXIM, the Export Import Bank of the US, has maintained a steady pricing structure throughout the crisis, and has seen its business surge during and following the crisis, especially as more and more US firms follow the tide of developing their export business to offset a still-sluggish domestic economy.
After approval by EXIM or other comparable insurer, maintenance of the program requires monthly reporting often online, paying premiums as you go, shortly after the end of the month in which the exports shipped.
To obtain EXIM insurance, the insured (the US exporter) must perform due diligence in the process of reviewing the foreign customer is a good risk. A credit report coupled with one or more trade references from other US suppliers, depending on level of export insurance requested, is required. There are various programs available involving either single-buyer or multi-buyer policies, with the latter often the less costly assuming the export risk is spread across a wide spectrum of export customers.
EXIM has announced recently however, a new Express Insurance program that streamlines and expedites the application and foreign buyer credit decision process for a nominal increased rate. Credit reports on all buyers the exporter elects to insure are complimentary, however unlike the normal program the credit report stays with EXIM. To be eligible for EXIM coverage, the applicant must be a small business as defined by the Small Business Administration (maximum between 500 and 1500 employees for manufacturers) with less than $5 million in export credit sales annually (excluding exports to Canada, exports under Letter of Credit or cash-in advance exports). Other qualifications are that exports must be of 50% or greater US content, and originally from the US. If your product is comprised of greater than 50% of non-US content, you’d need to select a private-sector export insurer such as Coface.
A side but tangible benefit of having export insurance is it can improve your balance sheet because lenders are more likely to advance funds against these receivables to increase your cash flow.
For additional information and consultation on these and other export finance instruments, please contact your existing bank or your local ISBDC office to connect with me directly. To view the Export Import Bank’s web address for Export Receivables Insurance, click: http://www.exim.gov/products/insurance/index.cfm
Do your homework – contact different export receivables insurance firms to price and policy compare, and look at your anticipated annual export activity for those exports you’d put under open terms only. The longer the terms, say above 60 days, the higher the rate for insurance, understandably.
Your export methods of payment such as a Letter of Credit (LC), or export receivables insurance can provide piece of mind that payment for your exports are governed.
Andy Reinke is the President of Foreign Targets, Inc. (FTI) an export management company creating and managing proactive export programs for small and medium sized manufacturing firms. This is achieved by utilizing a proven methodology: FTI’s Core-8 Steps to Export Management. Read more about export in the ISBDC’s Exporting Your Products and Services FAQ Page.