Overseas customers – getting paid

Selling to overseas customers can be good for growth, but the majority of businesses are put off by serious fears they will end up with bad debts. Take the right precautions and know what to do if you have to take legal action.

Incoterms protect

It's key to contract on the right terms in the first place. If you are exporting, trade using Incoterms – internationally recognised standard trading terms. By using the right Incoterm you minimise the risk of any ambiguity in your contract.

Even so, local laws may mean that some Incoterms are not fully effective or confusion arises. Your lawyer can advise you on the detailed requirements of each Incoterm in relation to exports to your target country.

Payment options

Payment options are:

• Sell on open account, as you do here. But investigate how long local payment periods are and the risk profile in that country generally. In some countries, payment periods can be significantly longer than is normal in the UK, leaving you with a potential cashflow problem. Check which information is publicly available in that country.
• Use a letter of credit or a bill of exchange. While there are several variations on this theme, these generally help to reduce your risk and can also help improve your cashflow, but will involve bank charges.

Insurance

Consider export insurance. If you are exporting capital, goods or services and your export order is worth at least £25,000, you may be eligible for cover from Britain's Export Credits Guarantee Department. You can download a guide to the Export Credits Guarantee Department (PDF) or visit their website.

You can use credit financing to ensure you get paid as soon as the contract is delivered and take out lines of credit to cover series of contracts, not just one.

Other options include arranging insurance privately through an insurance broker or using a 'forfaiting' company that will both finance your exports (by advancing payment against your invoice) and cover you against late payment or default.

Exchange rate risk

Take steps to protect yourself against exchange rate risk. Typically, this might be by agreeing the contract in pounds sterling or by arranging a currency 'hedge' (or possibly a currency option) with your bank.

Finger on the pulse

Once you have started trading, keep your eye on your debtors – query immediately any deviation from normal trading patterns (eg order levels, delivery, settlement, etc), and consider monitoring filings at public registries in countries where your debtors are registered for signs they are in trouble.

If in doubt, take legal advice.