Have you considered extending credit to international customers? If you are considering it you need to ensure that you weigh up the pros and cons. How much will exporting increase sales? What if a customer refuses to pay? What are the likely costs of pursuing an overseas debt?
There are definitely benefits to be gained through exporting. These include broadening your customer base and growing the reputation of your business beyond domestic consumers. Depending on your area of operation, you could also find overseas sales offer more attractive profit margins. However, there will also be a certain amount of risk so, before you decide to extend credit to overseas customers, you need to consider how much time and effort the change will involve, the financial costs and incentives, and how to go about conducting the appropriate checks on potential customers. The information below will help you to make the right decision about your exporting future:
To begin with you should consider why you extend credit to your domestic customers. For most businesses, extending credit allows them to increase sales and expand their customer base. However, you need to determine whether the same benefits are likely to apply if you export your products.
Ask yourself:
- Will this move deliver enough new clients to justify the cost?
- Will the offer of credit lines be the deciding factor in luring overseas customers away from competitors?
- Would international customers be put off by having to make advance payments or organising letters of credit?
You should also carry out market research to determine the potential of international markets relative to your business.
Once you have made this decision and decided to pursue the international stage, you need to make sure you have appropriate systems in place to determine the creditworthiness of your potential new customers.
Even if you don't export, if you have a solid risk management system in place you will credit check potential customers before granting credit. You need to put this system in place for your international clients as well. It's important to remember that these financial health checks need to be conducted regularly (not just at the outset of a new customer relationship) - just because a customer was in good financial health six months ago does not guarantee they are fine today. A credit reporting company such as Dun & Bradstreet can provide you with in-depth credit information on individual companies and on the risk associated with a particular country. This will help you select which markets to target and to determine the level of risk associated with a particular country or customer.
Another option available to help protect your business is trade credit insurance. But, before you jump in feet first and sign up to a policy, make sure you weigh up the cost of the insurance premium against the likely returns to your business. The majority of professional underwriters will assist you to assess the costs - shop around and compare the prices to ensure you get the best deal available.
If there are particular clients that you are uncertain about, or several major customers that you rely on to stay in business, you can target them in your policy. However, you should be aware that the larger the line of credit, the more it will cost you to insure against that customer.
Find out more about trade credit insurance >>
Simple steps such as beginning with a relatively small line of credit can help to protect you against potential losses. Once you've established that the customer is reliable and makes prompt payments you can decide whether or not to extend more credit. Never sacrifice sound judgement for the promise of quick profits from overseas markets before you have formed a working relationship with a client. If the demand is that high then it will remain so by the time you have looked into international prices and researched your overseas competition.
Always remember the old adage: If a deal sounds too good to be true, it probably is.
Be honest with potential clients and tell them that you will need to look into their background and credit history before you grant a line of credit. A genuine and reliable customer will have no problem with this and anyone that has an issue with this request could be sending you a flashing warning signal.
Common sense steps such as keeping all original invoices, documentation and receipts for your own records can prove invaluable should you need to pursue a debt overseas. Some countries will insist on reviewing all relevant paperwork and information relating to a claim before a dispute can be resolved.
These are just some of the factors that need to be considered before extending credit to international clients. Opening your business to overseas markets has vast potential, but you should ensure you have access to the knowledge, resources and collection skills required and that the costs involved don't cancel out the profits.
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