The benefits of having a solid credit management strategy in place are undisputed. It can help ensure you: get paid, which will strengthen your cash position and credit rating; mitigate the risks of non-payment, customer bankruptcy, refused shipments and more; and, you are more competitive because you can offer credit and favourable payment terms. All of which leads to more sales in the future.
But do you need to adjust your strategy for a new international market? Here are some important factors to consider.
Every market is different. Are open terms standard practice? Do customers generally pay slowly? In some countries it is commonplace for customers to simply tack on 30 days to the term before paying. To understand market nuances, reach out to credit groups and bankers, then develop terms of sale around that information.
If open terms are not standard, you can negotiate letters of credit, cash in advance or cash against documents. If open terms are normal, be sure to set them in line with the market norms of that country.
You need to know your new customer’s payment history. Are their payments in line with the market payment practices? Or do they pay better or slower than average? Do credit checks, and gauge the time you may need to spend with that customer to negotiate terms your company can afford and that your customer can comply with? Then take the time to enforce the agreed upon terms. By enforcing terms you will improve your cash flow and reduce the likelihood of non-payment.
Your appetite for risk
Now is a good time to revisit your current policies. When entering a new market, sit down with your sales organization and credit people and align your credit management strategy with the sales strategy. Then document the terms of sale and the currencies you are willing to accept. If you can risk significant exposure, perhaps you can give 120-day terms. If not, you may want to put a cap on your overall exposure within a given international market.
This will be important information so you can allow sufficient time for goods to arrive, for customers to take delivery, and make payment. It’s only fair to provide a reasonable time frame for delivery of goods.
You need to develop a feel for cultural expectations. In some places, it is polite to chat about a customer’s family before you can get down to business. Language can also be a barrier. If you have an employee that speaks the language, obviously this makes things easier. If not, communicating in writing can be easier and less open to misunderstanding.
Getting specific currencies out of certain countries can be difficult. Some countries have limited access to U.S. dollars. Other countries have currencies closely tied to commodities than may devalue as commodity prices decline. You might decide you are willing to take on the foreign exchange risk yourself and get paid in that country’s currency if it helps ensure payment. Or, if that makes you uncomfortable, you can put the foreign exchange risk back on your customer, but it may mean reducing margins to secure the sale.
Is there is any unrest in your target market? If so, you can buy insurance to protect against risks such as expropriation or not being able get your cash out of a local bank account. Another option is an irrevocable letter of credit in which a Canadian bank guarantees payment from your customer’s bank.
Risk management is even more important in less established markets. Proceed with caution. Involve your bank earlier. You may want to consider shorter terms, or cash against documents arrangements in which your customer needs to provide payment before gaining access to invoices, bills of lading and goods.
Taking additional precautions at the start of a relationship may be prudent; then you can reassess terms and ease of restrictions as trust is built.
Many of these factors should be examined on a case-by-case, customer-by-customer basis — with adjustments made as required. Your credit management strategy will benefit greatly from a solid understanding of your next big market. And, more than likely, so will your bottom line.