What to Check When Extending Credit to an International Client

Topics: Finance, Credit & Payments, Management

There are many reasons and benefits as to why you might want to extend credit to international customers. Broadening your customer base and brand, increasing sales, and additional international contacts are just a few of the benefits. But before you take the jump, knowing what to check when extending credit to a client can help you mitigate risk 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 you avoid disastrous situations.

Here are our tips on what to check when extending credit to a client or international customer.

Risk Factors When Extending Credit to International Customers

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

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? All of these factors can make it difficult to do business with customers under such conditions.

Working With Non-English Documents

Depending on where the customer is from, their business documents might be in a non-English language. For the legal safety of your business, any materials that your company engages with should be in English. If you choose to hire a translator, let the legal and financial responsibility of translating fall on the customer.

Understand Foreign Laws

It is essential to understand the laws of your customer's country. Understanding your customer's foreign laws is needed when it comes time to collect on nonpayment and for regular business transactions as you and your international customer work together.

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 returns if there is potential for landing additional customers within the same country.

Of course, if one customer is very profitable for your business, it might be worth going after them.

High Barrier to Entry

There will be a high cost associated with each country you choose to work with. Before you jump through all the necessary hoops, make sure that you can overcome cost barriers 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! Consider this before extending credit to international customers.

How To Check International Customers’ Credit

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

One option for checking international credit is Experian. 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.

Another way to check a customer's credibility before extending credit to international customers is by using supplier references requested on the customer credit application. This way, you can verify with suppliers if the customer has been paying on time.

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Updating Your Credit Policy for International Customers

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 country, 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.

Mitigating Risk When Extending Credit to International Customers

Once you accepted a new international customer, there are ways to mitigate risks if the customer fails or doesn't pay. These risk mitigations should be part of your credit policy before you accept your first international customer. 

As you can see below, DSO typically increases with international sales, making risk mitigation even more important when working with international customers.Screen Shot 2018-01-05 at 9.58.52 AM.png

Here are some ways to mitigate risks when extending credit to international customers:

Advanced Payments

Starting customers off with 100% advanced payment or even 75% will certainly reduce the risk of non-payment. 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 select invoices.

Bills of Exchange

For the first order, it may be best to introduce bills of exchange, or an intermediary, to guarantee payment for your goods or services.

Trade Credit Insurance

There are many options available to help companies selling across borders insure their exports. One good option is Allianz, offering trade credit insurance for national and international exports.  

What to Check When Extending Credit to International Customers

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 things, being prepared and armed with knowledge can help make your expansion a success.

Looking for a B2B international payment solution for your business? What about something better? Apruve can help you easily extend risk-free credit to your international customers. Learn more about Apruve's international services or contact Apruve’s specialists to sign up for a demo today!

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