Growth Through Exporting: How to get paid?

In his recent blog post, Bill May with High Value Manufacturing Consulting wrote about the growth opportunities for SME’s in exporting. The figures are impressive and the business case for expanding outside the borders of the US is convincing.

Consider these:

1. According to the International Trade Administration, 95% of the world’s consumers are outside the United States. The export market for US companies is huge and companies who sell only domestically are reaching only a small share of potential customers.
2. Exporting helps SME’s diversify their customer portfolio and protects from slower growth in our domestic economy. This means that the economic risk is spread across multiple countries and regions of the world. For companies whose products or services are very industry-specific, exporting opens opportunities within their industry world-wide.
3. Tax laws let you save money and cut taxes on export sales. Using tools such as an IC-DISC (Interest Charge Domestic International Sales Corporation), US companies can reduce taxes by 50% on up to half its export sales.
4. With US manufacturing investment in other countries, US companies can capture increased business with existing domestic companies by supplying the plant locations outside the US in other countries. The auto industry’s expansion into Mexico is a good example.

How do you get paid when selling outside the US?

1. Pre-pay. For exporters with a unique product or value proposition and leverage over the customer, pre-pay is an option. Getting paid up front eliminates credit risk, provides immediate cash flow and benefits the seller/exporter tremendously. For most businesses, it’s not a realistic option since competition will dictate the extension of credit to be competitive.
2. Letter of Credit. Perhaps the most common form of payment guarantee, there are many kinds of letters of credit. The drawbacks to a letter of credit are:
   1. the buyer/customer has the cost of providing the letter of credit
   2. the paperwork and sign-off’s required can be complicated
   3. the buyer/customer ties up its bank credit (great for the seller/exporter) but not as good for the buyer.
3. Open terms backed by Credit Insurance. When exporting, extending trade credit to the customer and backing it with credit insurance protection helps in three ways. For an overview of what credit insurance is and how it works, see my recent article, “Back to Basics: What is Trade Credit Insurance?”
   1. The buyer/customer is given credit by the seller instead of being asked to tie up their own credit for the privilege of doing business with them.
   2. The cost of insuring the extension of credit by the seller is very small in comparison to the cost of a letter of credit (basis points vs. percentage points)
   3. There is no paperwork or sign-off process with credit insurance which makes the transaction simpler for both the buyer and seller.

Conclusion

There’s a case to be made for using all three methods of payment with export customers. Do what makes sense for your business but don’t forget to minimize risk throughout the process. In my experience, the easiest, most market-friendly way to minimize risk and increase domestic or export sales is through trade credit insurance.