Do Your Payment Terms Make the Most Sense When it Comes to Your International Customers?

Do Your Payment Terms Make the Most Sense When it Comes to Your International Customers?

Forms of paymentPayment Options

Cash up front

BENEFITS

  • Zero risk of non-payment to you
  • All of the risk is on the buyer, waiting for the shipment

DRAWBACKS

  • Not fulfilling your sales potential – cash up front limits the number of customers that want to do business with you
Cash on delivery

BENEFITS

  • Can ask for deposit to reduce risk
  • Safer than unsecured open accounts. With cash, the seller still owns the goods until delivery

DRAWBACKS

  • Seller bears all the risk, costs and responsibilities of shipping

Letters of credit

BENEFITS

  • Balances the risks between the buyer and seller
  • Transfers the payment risk from the buyer to the bank
  • The conditions of payment are spelled out in L/Cs

DRAWBACKS

  • Does not protect against country risk or political risk
  • Every shipment requires interaction with banks and dealing with a  lot of documentation (time consuming and tedious)
  • Any discrepancies in documentation can result in non-payment
  • All the burden is on the buyer, which may restrict sales opportunities
  • Significant costs associated with setting up letter of credit for both  buyers and sellers (up to 3% per transaction)

Open account terms

BENEFITS

  • Able to do business with customers that require payment terms
  • Foreign companies buy an average of 40% more when given open payment terms1

DRAWBACKS

  • If your business has a 5% net profit margin and one customer doesn’t pay a $100,000 invoice, you need to generate an additional $2 million in sales to make up for it
  • Internal credit management resources are required to manage  risk, including a bad debt reserve to offset losses, which ties up working capital

1 Receivables can account for 40% of a company’s assets (largest asset on your balance sheet)

Categories Exporting

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