SMEs - Why should I worry about actually getting paid for my exports, more than any other factor involving my overseas sales?

Getting paid is probably the most important consideration for a Seller whether they are a multinational company or a sole trader when they enter into a commercial transaction. Since the global downturn commenced in 2008, there has been an intensive drive by the UK Government to encourage all companies to seek new markets around the world, and to effectively "export the UK out of recession". Whilst it is entirely true that new markets can present some very attractive opportunities, there are also greater commercial and financial risks associated with export sales. These risks are especially acute for SMEs who may be unable to bear a substantial bad debt.

In essence it is important for those smaller businesses who are less experienced in this area to invest time in some essential groundwork and due diligence in consideration of "Will I get paid?".

First steps -

• International Credit reports which provide information on the creditworthiness of potential overseas buyers are available to order on line from Dun & Bradstreet and Experian.
• Buyer's bank references are a possibility but are less commonly requested these days and the information provided is usually quite bland and non committal.
• A local agent can be very useful in helping to provide on the spot "encouragement" to the buyer, when payment is due.

Consider the country risks & sanctions-

• Carefully consider the likelihood of the country's involvement in, or being affected by acts of terror, war or internal violence within the country. Things can change very rapidly - Egypt, for example was a very different place 12 months ago!
• Check with your bank regarding sanctions - they will provide you with an up to date view on which countries they will accept payment from, and others where they will simply return the funds to the remitter's bank and refuse to process, as it would breach their policy on sanction compliance.

How will payment be made?

If you are Seller on Advance Payment or Open Account terms insist that your Buyer sends funds via the SWIFT system and ensure that you clearly quote your IBAN number on your invoices. Most Buyer's will have an online banking system which allows them to format and send international payments. UK banks will charge around £6 - £15 on average to process an incoming payment from an overseas bank.

Avoid payment by cheques at all costs! - UK banks will batch up overseas cheques, and either "negotiate", i.e. pay you now, but charge interest and retain the right of recourse, which means they will debit you, if the item is unpaid. The other option involves "collecting" the cheques, which means they will send them, in a batch to a clearing agent in the overseas country, who will clear the cheques in the local system. This can take 4-6 weeks for proceeds to be paid.

Documentary Collections - This is where shipping documents are sent forward usually by the exporter's own bankers, with a collection schedule which instructs the Buyer's bank how they should handle the documents and obtain payment from the Buyer. It would be fair to say that Documentary Collections are less popular these days, possibly because whilst providing a degree of structure to the payment process, (since both sets of banks are involved), neither bank guarantees that payment will be made. A recent quote from an SME exporter "I never really know whether my Documentary Collections will be truly paid, until I see the proceeds in my account".

Letters of Credit - A secure method of payment, especially if it has been confirmed by a trusted bank in the UK. It should be noted that UK bank's appetite to add their confirmation to Letters of Credit will change on a very regular basis. Incredible as it may seem now, in Q3 2010, there was some appetite (albeit limited) to add confirmation to Letters of Credit issued by a select few banks in Libya! Best advice is for exporters to check with their own bank/preferred trade finance bank regarding current risk appetite and charges to add confirmation to incoming Letters of Credit. It should also be emphasised that the exporter must ensure that their documentary presentation is compliant with the terms laid down in the Letter of Credit to ensure payment is guaranteed.

Export Invoice Finance/Factoring - An option for some SMEs, probably slightly larger companies, who are selling goods on a regular basis to a spread of overseas buyers/countries. Most banks offer this service, and it would involve them insuring on average between 70% - 90% of the value of invoices to approved buyers in approved countries. Set up and ongoing fees can be perceived as high, but it is a viable solution, which can help accelerate cash flow and ease political/economic worries.

Standby Letters of Credit - An increasingly popular choice for SMEs who are exporting on a regular basis, and who require some extra comfort that if payment is not received in accordance with the contractual terms, a claim may be lodged under the Standby Letter of Credit, and the Buyer's bank is obliged to pay that claim. Anecdotal feedback from Buyer's suggests that they are less willing to put these structures in place as their bank's will demand some security/collateral and the terms of these Standbys are usually very simple meaning that unfair claims are a possibility.

Be prepared to negotiate with your bank on all of the above payment methods and ask them for their published tariff. Some UK banks do not publish their international business tariff on their websites, but ask them for a copy! You are entitled to know what you are being charged!

Credit Insurance - The main players are Attradius, Coface and Euler Hermes. Worth considering but often the insurers may not be prepared to cover selected Buyers and will require your whole export book. They will cover proven insolvency of your Buyer, protracted default (Buyer failing to pay), but will need proof there is no contractual dispute.

When will I receive payment for my exports?

It is an indisputable fact that exporters have to be prepared to offer longer periods of credit to many overseas Buyers, than they would traditionally offer to their customers in the UK. In some territories, it is almost woven into their very fabric of life that 90 to 120 days should be offered by a Seller, and this can have a seriously negative effect on the Seller's cash flow. It can be a telling moment when an exporter realises the size of the funding gap which will exist (from received an export order, through manufacture, shipping and allowing a long credit period, to finally receiving in the proceeds of the sale).

There are possible steps that an exporter can take to help bridge this funding gap such as;

Building in stage payments - this is usual for sizable contracts involving the manufacture and installation of large pieces of capital equipment. The sting in the tail is that these types of contracts frequently involve the Seller's bank having to issue Tender/Performance/Warranty Guarantees which will tie up the Seller's banking facilities.

Letters of Credit can be discounted in many instances on the presentation of compliant documents by the Seller despite the fact that the Letter of Credit is actually payable, for instance 90 days after the Bill of Lading date. If the UK bank has added their confirmation, they will almost certainly offer to pay the Seller as soon as they have examined the documents and found these to be compliant. They will pay the Seller, less interest (and charges)on a non recourse basis, so if the buyer's bank won't or can't pay owing to political/economic factors, it is of no concern to the Seller.

In summary, securing payment for an export sale is key, and as one bank used to put it - "an export is a gift until it is paid for". SMEs can access some first class advice on securing payment, from UKTI, their local International Trade Manager (all banks will have regional trade specialists, who will be able to provide help and advice about securing cross border payments for exports.) So with some reasonable care and initial research a robust export sales policy can be established and the worry of bad debts having a serious effect on a the profitability of the business can be eased.

Written on 13th October 2011 by Richard Casburn MIEx (CITA), S&H LLP Associate & Trainer

Relevant Training:

Risk Management & Finance for Importers

Letters of Credit for Exporters

Export Essentials

Import Essentials