Getting paid is critical to your export success. It isn’t as simple as sending your goods to your buyer and expecting the payment to show up into your account. There are different payment models and you will need to be careful in negotiating a contract with your international buyer, particularly when you’ve never worked with them before. When things go awry, trade credit insurance can protect you against non-payment and currency exchange risks.
It is also important to track payment as a key performance indicator (KPI). Are you getting paid on time? What percentage of your export operations make up your total revenue. These must be key considerations when exporting. These KPIs should be set up to track how successful your export operations have been, and how exporting has affected your business. This will allow you to find efficiencies and to track which areas need improvements and whether you need to modify your operation in a foreign market.
Different forms of payment can open you up to varying levels of risk. For example, taking payment in advance of shipping reduces your risk as a seller, but opens up risk on the side of the buyer. Whereas, paying after delivery of the goods is riskier for the seller, especially if the payment is to be received directly through an open account without any kind of intermediary.
These are some payment models for you to consider:
- Cash in advance: The customer pays prior to shipping the goods.
- Letters of credit: A Letter of Credit (L/C) is set up by the customer with their bank, which will guarantee the payment and check shipping documents. Optionally, this L/C can then be confirmed the seller’s Canadian bank to guarantee payment if the foreign bank does not pay. After shipping, if all the documents are in good order and the requirements are met, the customer’s bank will pay the seller’s bank, which will then pay the seller.
- Documentary credit: A documentary credit is similar to a letter of credit, except that the bank is not required to pay if the customer decides not to buy. This payment method is less expensive than an L/C, but it is a higher risk as payment is not guaranteed. A documentary credit can be a sight draft (full payment is received on presentation of the draft to the bank), or a term credit, which allows the buyer to make payments over terms of 30, 60, or 90 days.
- Documentary collection: After the goods are shipped, the seller then sends the documents to a collection bank. The seller will then receive the payment from the bank once the customer as has paid. However, the bank will not guarantee the transaction.
- Consignment: Goods are shipped prior to payment, however ownership of the goods remains with the seller until the goods are sold.
- Open account: The seller ships the goods and passes ownership onto the customer before any payments are made. The customer then has a certain time period (30, 60 or 90 days) before the customer must make payment to the account. In this model, the seller assumes all risk for non-payment.
Step-by-Step Guide to Exporting – Step 8 – Identifying your export financing requirements
Canadian Trade Commissioner Service
This section of the Trade Commissioner Service’s exporting guide provides information about export financing and collecting payments for transactions.
Prior to engaging in a sale of goods or services to a new international buyer, it is a good idea to set up an international contract. You will need a lawyer specializing in international trade to help you do this.
A contract covering the sales of goods should include:
- Agreement of ‘proper law’ (i.e. whose country’s laws are applied in which circumstances)
- Terms of payment
- How the goods will be transferred and the exact legal moment defining that transfer
- Terms under which acceptance or refusal of the goods must take place
Contracts for sales of services can be a bit more complicated, especially when they involve personnel and facilities. In addition to details about the service provided, personnel and facilities, timing, and payment structure involved, it is important to set up a series of procedures and conditions that define how the work must proceed, what should happen if there is a performance issue, dispute, or issue with the facilities, what are the conditions for a holdback, etc.
When negotiating a contract, it is important to consider the business culture of the buyer. Make sure to do your market research first, which should include making contacts on the ground.
Step-by-Step Guide to Exporting – Step 9 – The fine print: understanding the legal side of international trade
Canadian Trade Commissioner Service
This section of the Trade Commissioner Service’s exporting guide provides a more detailed look at contracts as well as information on corporate social responsibility.
Trade credit insurance
Trade credit insurance will ensure that you get paid, in case of issues with customer bankruptcy, contract cancellations, and other unforeseen risks such as currency fluctuation.
Currency fluctuation is a natural phenomenon of the floating exchange rate system. It arises when there is a change in the price of one currency in relation to another. An exchange rate risk exists when a company needs to make or receive payments in a foreign currency. Even if a company completes every transaction in Canadian dollars, it is still exposed to risks from exchange rate shifts and monetary policy changes.
Another key risk involves the failure of the customer to pay. The safest payment model for your business is advanced payment prior to delivery. However, these terms can make it harder to win international contracts.
Certain payment models like letters of credit can help mitigate these risks. However, these risks can also be mitigated through the purchase of insurance like credit insurance to protect against non-payment or political risk insurance, to protect against political volatility and currency fluctuation.
To determine whether you should purchase trade credit insurance and your options for purchasing insurance, it is advisable to consult with an insurance agent specializing in trade credit insurance.
Export Development Canada: Our solutions
Export Development Canada offers a variety of insurances related to exporting including:
- credit insurance to protect you against non-payments
- political risk insurance to protect your investments and assets against political events
- performance security insurance, for managing the risks associated with working with new customers internationally
Build your export plan
Answer these questions to start filling in your export plan template. As you answer each question, your responses will be sent to your export plan template, which you can download below.
Export plan completion
This information is a guide only and should not be considered or quoted as a legal authority. While best efforts are made the keep this guide up-to-date, parts of it may become obsolete at any time without notice.