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Posted by Matt Duczeminski - 16 January, 2018

Things To Consider Before You Extend Credit To International Customers.

Things To Consider Before You Extend Credit To International Customers ...

There are many reasons and benefits as to why you might want to extend credit to international customers. Broadening your customer base and brand, increased sales, additional international contacts are just a few of the benefits. But before you take the jump, know the risks and how to mitigate them ahead of time.

While you can't remove all risks when evaluating international prospects, having a plan in place that you follow and update regularly can help avoid disastrous situations.

In this article, we'll discuss what to check before you extend credit to international customers.

Signs To Watch Out For Before You Extend Credit

There are a few high-level signs to watch for before you extend credit to an international customer. Here are a few:

Country Risk

What are the political and economic environments of the country where the customer is doing business? Is there currently a revolution? Is the country on the brink of financial collapse. Have international sanctions stricken it? All of these factors will make it difficult to do business with customers under such conditions. Additionally, collecting on non-payment will be nearly impossible.

Non-English Documents

Depending on where the customer is from, all of their business documents might be in a non-English language. Any materials that your company engages in should be in English. While you could hire a translator, let the burden and legal responsibility of translating be on the customer.

Countries Laws

It will be essential to understand the laws of the customer's country. This is not only needed when it comes time to collect on nonpayment but also for regular business transactions.

Potential For Repeat Business

Going after only one customer within a country is a lot of work. You'll reap economies of scale and better return if there is potential for landing additional customers within the same country. Of course, if the one customer if very profitable for your business, it might be worth going after them. 

Are The Costs Worth It

There will be a high cost associated with each country you enter. Be sure that you can overcome them with the business generated by each country.

Collection Agencies Procedures

Knowing about different collection agencies within a country will let you explore their procedures and costs. If you can't find any reputable collection agency within the country, it might be a red flag or even a no-go!

Now that we are aware of a few things to take into consideration before we extend credit to international customers, let's look at a few ways to check their creditworthiness.

How To Check Credit For International Customers

Just as you can run credit reports for domestic businesses, you can also run them for international businesses.

Experian has a service called International Reports and Resources. Experian's reports provide an overall risk assessment along with plenty of data to evaluate potential customers.

FCIB is another company that offers similar reports on international prospects.

You can also request to review a customer's financial statements and accounts. While financial statements can be inaccurate, bank accounts that you can verify are more difficult to fake. With a customer's SWIFT Code and IBAN, which are used to identify a bank and bank account respectively, you can verify account information.

Using supplier references requested on the customer credit application, you can verify with suppliers if the customer has been paying on-time.

Updating Your Credit Policy

Your credit policy is going to need a large addendum for international customers. In fact, it will need one for each country since laws will be different across countries. Of course, if you are working with a European Union countries, that can make things simpler.

Your accounts receivables and credit risks teams will need to be aware of how to best use the updated credit policy. Communicating with international customers will probably be a little different as well. Although, expect many to use email, just like your domestic customers. But there will be times when talking on the phone is necessary. Does the customer on the other end speak English? If not, you'll need to make arrangements with a translator.

Mitigation of Risks

Once you have accepted a new international customer, there are ways to mitigate risks if the customer fails or doesn't pay. These risk should be part of your credit policy before you accept the first international customer. As you can see, the DSO typically increases with international sales:
Screen Shot 2018-01-05 at 9.58.52 AM.png

International Payment Dates

Advanced Payments

Starting customers off with 100% advanced payment or even 75% will certainly reduce the risk of nonpayment. After customers have consistently shown they can pay on-time, you can work them into net terms.

International Factoring

Having the ability to use a factor can be a great option when it comes to collecting on select invoices.

Bills of Exchange

For the first order, it may be best to introduce an intermediatary to garauntee payment for your goods or services.

Conclusion

Getting into international markets is a great way to expand your business. Keep in mind that with expansion comes risks. Extending credit terms to international customers present unique challenges but that shouldn't deter you. As with most anything, being prepared and armed with knowledge can help make your expansion a success.

Net 30 credit cost of accounts receivable

Topics: Finance, Credit, Management