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How to Product Your Company
When You're Selling Overseas

Foreign receivables is a subject that can cause some credit managers to crow--but it can make others cringe. Some of them are just plain lucky in their international collecting, while most others invest a lot of sweat, tears and hard work protecting their companies in their international business ventures. Companies can make big money abroad, but without the proper procedures may not be able to collect it.

Western Capital suggest these steps to take to protect your company before and after an international sale, trade, or investment:

  • Investigation: Develop a thorough credit portfolio.
  • Safetynetting: Minimize credit vulnerability.
  • Speed and care: Don't let haste make waste.

When establishing credit terms for a specific international market, one must consider the customer's credit-worthiness, the stability of that foreign market and the accepted customary business practices for transactions there. There is no need to change or tighten your credit terms just because you are dealing with a foreign market, but detailed analyses of credit-worthiness can mean the difference between success and failure.

The first step in establishing a thorough credit portfolio is the "safeguard double security" system. It hinges on investigative techniques: conducting investigations of the country and of the company you want to sell to.

Many multi-million dollar corporations employ complete international "investigation" departments, so that an individual credit manager may not have to single-handedly get the information. However, regardless of the size of the corporation, as well as which department is responsible for the research, these questions are often overlooked.


INVESTIGATING THE COUNTRY

As an exporter, you should be aware of what is occurring in the world marketplace. Ideally, you should be aware of which countries are experiencing financial difficulties, whether you trade with them or not, as their conditions could easily affect a country that is in your company's interest.

You may want to develop a "check-list" format, containing questions such as these to help make a proper and complete credit evaluation:

  • Is the country meeting present financial commitments?
  • Is it continuously borrowing, while rarely repaying?
  • Is the political situation stable?
  • Is the country's credit standing with international banking sources deemed relatively credit-worthy, or high risk?
  • What are the country's regulations regarding currency exchange?
  • What are the relevant import/export procedures, regulations and license requirements?

Improper or incomplete documentation is one of the most frequent causes of problems with an international transaction. You need to be careful and thorough, scrutinizing every aspect in the preparation of all appropriate documentation.

For example, you might already have an excellent relationship with a foreign company in a country where the government has control of all hard currencies to be paid out of the country. You have investigated thoroughly and determined that the risk was worthwhile. You ship the goods, they are received and the company is ready to pay.

But the goods are denied approval for payment by the government because a certain document wasn't completed, or was completed incorrectly. Payment is delayed while you try to rectify the problem. Every day of delay hurts cash flow.


INVESTIGATING THE COMPANY

After you have learned some major facts about your host country, you should investigate your prospective customer's financial health. Here is a checklist:

Organization

  • Legal status. Corporation? Partnership? Sole Proprietorship?
  • Legal name.
  • Country of incorporation or registration? Date of incorporation.
  • Officers (names and titles).

Ownership

  • Names.
  • Percentages. Headquarters and branch office addresses, nature and scope of business.

Financial

  • Dun & Bradstreet or other foreign credit reporting service. Date, rating, payments, number of employees, condition, trends, comments.
  • Latest financial statement date(if applicable/available).
  • Terms of sale. Government, export, days sales outstanding.
  • Banking. Names, credit-line description, how secured, interest rate.
  • Credit references. Banks(name, address, contact, account numbers), trade(US companies that have traded with the organization in their own country; companies in different countries that have traded with them).

Other questions that should be considered include:

  • Can the company meet your domestic credit requirements for an "open account"(i.e., a minimum initial standard)?
  • Do they have the ability and availability to pay you in U.S. funds?
  • Do their credit references confirm that this organization has a demonstrated ability to perform in accordance with your credit terms? (It's important to focus on their ability to pay rather than how you can adapt your credit terms).

Several sources can help with this research, including your international banker, the International Chamber of Commerce, the International Trade Administration, the Overseas Private Investment Corp., foreign credit reporting services and Eximbank. The regional offices of the U.S. Department of Commerce are also ready to help.


MINIMIZE CREDIT VULNERABILITY

Once you have decided to ship an order, what can be done to maximize your potential payment?


OPEN ACCOUNT TERMS

The use of open account terms in international transactions should be limited to those customers who have been properly investigated or those you've done business with previously. Open account terms are usually reserved for domestic customers of those located in stable political environments.

There are drawbacks associated with open accounts. If the country has a dollar exchange shortage, buyers on open account are sometimes unable to get US dollars readily. This problem can be magnified in countries where applications for exchange to settle dollar drafts take precedence over applications for exchange to settle open-account transactions. And, to make matters worse, if a customer does not pay, the open account sale doesn't offer any tangible evidence of obligation that is needed for litigation.


CASH IN ADVANCE TERMS

Prepayment leaves the seller with little or no risk, but is hard on the buyer. Western Capital  recommends that this procedure be used for three kinds of customers: those that purchase infrequently and that appear to have little opportunity to become repeat customers; customers in countries rife with political instability, and those in countries where there is a great deal of economic risk (near default, money system collapse, etc.).

When quoting the customer, specific directions for how the money is to be transferred ought to be included. For example, should all money be payable in US funds? Will the money be transferred via telex or wire transfer?

Standard wire transfers are better than checks, but because of a lack of uniform international procedures, they can be confusing. That is why banks often recommend an international wire system. Two are available: The Society for Worldwide Interbank Financial Telecommunications (SWIFT) and the New York Clearing House Interbank Payment System (CHIPS).


LETTERS OF CREDIT

A letter of credit is a declaration by a bank that it will make certain payments on behalf of a specified party under specified conditions. The L/C authorizes the exporter to draw drafts on a bank and to receive the funds by presenting the prescribed supporting documents.

Of all the method of collection, however, the letter of credit is one of the safest available, other than cash in advance or a documentary sight draft (documents against payments).

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