Exporting tends to be more demanding financially than selling in the UK. Consignments are usually larger, lead times are longer and the risks are more difficult to control.
Negotiating the terms of an export sale is a matter of balancing the risks and the costs to you and your customer. At the same time, you may need to take into account the problems of handling payment in foreign currencies.
This briefing focuses on:
Standard international terms are set out in 'Incoterms 2010'.
Ask potential customers what terms they prefer and what causes them problems.
The customer's creditworthiness will determine what payment method you are prepared to accept.
You must provide all the documentation required by the purchaser and by the payment method you are using.
Goods for non-EU countries must be declared to HM Revenue & Customs before they are released for export, so export invoices must be prepared ahead of dispatch.
The payment method you use has a significant effect on the financing you require and the level of risk to which you are exposed.
Typically, the credit term (eg 30 days) starts once you despatch and invoice for the goods, in line with the terms of trade.
Open account payment is typically used for exports within the EU and export sales to customers with whom you have an established relationship.
An overseas bank, acting on your bank's behalf, will only release the documents necessary for your customer to take possession of the goods once they formally accept the terms of the bill.
You still have ownership and control of the goods, but in your customer's country.
You will have a strong basis for pursuing legal action against the customer.
You can specify immediate payment, payment after a set number of days, or payment by a given date.
Your terms of trade must specify who is responsible for paying these charges.
Documentary collections are typically used for exports outside the EU to customers you have an established relationship with.
Your customer arranges a letter of credit with their bank (the 'issuing bank') which pays a correspondent bank in the UK (the 'advising bank'), once you submit all the necessary documentation.
As long as your documents are accurate, the issuing bank guarantees to pay you within the stipulated time.
A 'term' credit, where payment is made after a set term (eg 30 days) will require you to finance the gap between delivery and payment.
The customer will want to pass these costs on to you as part of the price negotiation.
Documentary credits are typically used for exports to customers you have not sold to before, and for customers and countries that present particular credit risks.
Payment or part payment in advance is typically used for low value sales to individuals or new customers.
For any individual transaction, the most appropriate method will depend on the level of risk involved, how strong your negotiating position is, and how the cost of financing compares for you and your customer.
A bill of exchange is a written document in which 'the drawer' requires 'the drawee' to pay a specified amount.
The bill will also specify when payment should be made.
Drawees become legally liable for payment once they 'accept' (agree to pay) the bill.
'Negotiable' bills specify payment 'to the order of' the drawer.
Unless you have negotiated payment in advance, exporting may require additional financing.
Your bank may only accept this form of security if it has approved the customer, or if you purchase credit insurance.
If the customer fails to pay, you will be exposed to the additional risk that the exchange rate has moved against you.
Your bank (or another financial institution) buys the bill from you for a discounted value. The amount the bank pays depends on the currency, amount and term of the bill and the creditworthiness of the drawee.
The third party will usually charge for this.
Typically, the margin for a bill that has been accepted by a high quality drawee (eg a major bank) will be 1-3%.
You can convert the proceeds (see 4.2).
This financing can be arranged on a 'recourse' or 'non-recourse' basis.
Typically, this would be a major bank or a creditworthy government.
You draw up a series of bills of exchange with different terms and can then negotiate them all at once.
You receive the balance upon settlement.
Each financing option, whether in pounds or a foreign currency, has different costs and cashflow implications. Explore your financing options before agreeing your terms.
Most customers will prefer you to quote and invoice them in their local currencies, rather than pounds. Unless you are prepared to do so, they may choose alternative suppliers. However, invoicing in a foreign currency exposes you to additional risks and costs.
With a 'spot' foreign exchange transaction, you sell a bank foreign currency in return for pounds.
For a £100,000 transaction in a widely traded currency (eg US dollars), the effective cost might be 0.1-0.5%.
You agree to sell the bank the foreign currency at a fixed future date for a price that is set now.
The effective transaction cost of a forward contract is typically 0.2-0.6%.
You will then be at risk for any adverse movement in the currency.
This gives you the right, but not the obligation, to sell the foreign currency at an agreed rate on the specified date.
A three-month option on a specific forward exchange rate might typically cost you 2-5%.
For amounts less than the equivalent of £100,000, the interest rate is likely to be substantially below the interbank rate.
Fewer, larger transactions will be cheaper and involve less administration than converting every payment received.