When trading internationally, if there is one thing that businesses can count on, it’s that – to varying degrees – banking in foreign jurisdictions will be different than it is at home.
Whether it is the U.S., where the use of cheques remains popular but is declining with the rising popularity of payment cards, or China, where cash is favoured for smaller transactions, and cheques remain valid for only 10 days, it is essential that companies contemplating an international expansion make banking issues a strong consideration in their business planning.
While noting that “at a basic level, trading internationally is not vastly dissimilar to trading domestically,” Toronto-based Andrew Skinner, Head of Global Trade and Receivables Finance at HSBC Bank, cautions, “an exporter should not attempt to sell into a region prior to consulting their bank.”
Where should you bank?
A banker’s advice may begin with suggestions on where to best establish a banking relationship within a particular region. For example, Skinner says in Asia, World Bank data cites cities such as Singapore and Hong Kong as easier places to do business, in part because banking systems and regulatory regimes are more familiar to westerners. As such, both jurisdictions are considered favoured access points to ASEAN markets.
Skinner adds that bank-lending practices worldwide vary by location and can impact a firm’s access to capital. “Margin-based lending is common in Canada. But the same can’t be said for the Middle East, Latin America and Asia, where lending is much more transaction-based.
“In some markets, there are liquidity and foreign exchange controls – practices that may involve extended payment terms.”
What payment method should you use?
Location is just one important consideration. At a transactional level, the payment method a firm uses – which can range from open account and letters of credit to documentary payment – can materially impact financing requirements and the level of risk a business assumes.
For example, Skinner says open account payment – a method used to facilitate some 80 per cent of global trade – is similar to offering credit to a domestic customer, with payment terms of 30 days or more starting once goods are shipped and invoiced.
“This is the simplest and the least expensive method of payment, but it does assume a level of confidence in a trading partner’s ability or willingness to pay.”
For new client relationships, letters of credit (a.k.a. LC / documentary credits) offer the most secure method of payment, other than pre-payment.
With an LC, the importer arranges to have its bank (the ‘issuing bank’) pay a correspondent bank (the ‘advising bank’) on receipt of required documentation.
“LCs are not an absolute and automatic guarantee of payment, but they do offer reassurance that exporters will be paid,” says Skinner, “so long as the right documentation is presented within the appropriate timeframe, and importers actually receive the goods they ordered.”
However, LCs do not protect an exporter against risks such as a default of the issuing bank, or in an instance where a change to the law in the importer’s country makes settlement of an LC impossible.
Letters of credit, as well as trade credit insurance – like those offered by EDC – nevertheless help mitigate various forms of risk, notes Skinner.
Documentary collections (DCs) are another form of secured payment. With DCs, an overseas bank acts on behalf of the exporter’s bank, and will only release documents enabling the importer to take possession of the goods once the importer formally accepts the terms of the bill.
While the costs associated with a DC are lower than with a letter of credit, “the exporter still carries the risk that the importer will not settle the bill when it comes due,” cautions Skinner, who adds, “Exporters should discuss various payment options with their banks in order to select the solution best suited to their needs.”
Who should you bank with?
An exporter’s choice of a banking partner is in itself fundamentally important, especially because exporters rarely stop expansion plans at one market.
“Many banks are typically localized to domestic accounts, currencies and payment types. Sometimes banks support global/international accounts and payment types, but it costs extra, or is a separate (non-integrated) module or add-on,” says Skinner. “You have to be careful, and know you can grow with your bank.”