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When it comes to getting paid, small export business owners shouldn't structure deals with foreign customers the same way they would with a domestic customer because risks, if not managed, may be far greater.
"U.S. companies often give their customers net 30- or 60-day credit terms, but that's not done with international sales unless a multi-year relationship has been established," says Richard Smolenski, CEO of Convergent Sales Strategies Inc., an import/export business consultancy based in Denver.
Giving overseas companies extended credit terms for foreign transactions may add unacceptable risk to small export business models and leave owners vulnerable if that foreign customer doesn't pay, he says. "Without safeguards, trying to collect across multiple countries, legal jurisdictions and international laws can be virtually impossible."
— Richard Smolenski, CEO of Convergent Sales Strategies Inc.
To avoid such risk, exporters should demand international payment up front whenever possible, says James Berkeley, managing director at Ellice Consulting, a management consulting firm based in London. When working with international clients, Berkeley states in the contract that they must pay 50 percent of the total cost on day one of the project and the remaining 50 percent 45 days later. "Those terms are my starting point," he says, "and if a company needs my services, they will agree to them." It may sound extreme, but Berkeley has never had a customer push back against these terms.
To avoid exchange rate losses, Smolenski prefers receiving payment in U.S. dollars (USD) for most export deals, especially for large orders where foreign currency fluctuation may bring too much risk. "If you submit a quote for $50,000 worth of goods, you set the price based on the exchange rate of that day. But when payment is made at the time of order - weeks or months later - the rate could be very different," he says.
To avoid losing money to the market, foreign customers can use a trusted online foreign exchange service to take advantage of desired exchange rates at the time of payment, and ensure that the international payments they send to overseas suppliers are worth the same when they are received at the other end despite later currency fluctuation.
Berkeley is more flexible: He maintains bank accounts in USD, euros and pounds to accommodate different client payment method preferences while minimizing his own currency risk. When he works with companies in Asia, the U.S. or the Middle East, he quotes his prices in USD because that is the most common reserve currency.
Having three separate accounts adds complexity to his accounting process, but it gives him some control over currency fluctuations and makes it easier to do business with him, he says. "I usually make conversions twice a month on the first and the fifteenth, which minimizes the volatility. Weekly would be simply too time consuming, and monthly would leave me open to significant swings in currency fluctuations."
To further protect his cash flow, Berkeley has customers wire international payments directly to one of his bank accounts rather than taking international checks, which can take 30 to 45 days to clear and are difficult to track, he says.
Completing foreign transactions through a trusted online foreign exchange service can improve transparency of an online wire transfer by enabling export business owners to track the status of their foreign customers' payments. Plus, there are no hidden fees.
To ensure a mid-project payment is made, Berkeley sends an invoice 30 days before it's due and calls the client on the due date and every two weeks after if the payment isn't made. If 30 days pass, he tells the client that he will suspend all work in 48 hours until the accounts are caught up.
"So I let them know that they are putting their project outcomes at risk unless the overdue payment is settled immediately," Berkeley says.
Example: 1USD = xx INR
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