Deciding on payment terms is an important part of negotiating a sale, not just because you want get paid on agreeable terms but because it can determine whether or not you get the sale. Agreeing on terms you can live with that won’t scare away your buyer can be difficult, and it’s a balancing act that requires experience to master, as well as a rock-solid understanding of your market.
Your ideal situation is to reduce your risk by receiving payment as early as possible, preferably before the goods are shipped. This means your buyer is providing you with unsecured credit, as you have the money but your buyer doesn’t have the product.
Your buyer’s ideal situation is to receive your goods before paying for them, and by paying as long after delivery as possible. In this situation, you are providing the buyer with unsecured credit, as they have the goods and you don’t have the money.
Finding a middle ground between these two extremes is the crux of any sales negotiation.
Offering Flexible Payment Terms
Giving your customers a choice in how and when they make their payments can give you a substantial advantage over your competition, help you close important sales and ensure repeat business. However, if you do offer customers an extended amount of time to pay, you need to have the cash flow available to survive without getting paid for a while. If this isn’t the case and your margins are thin, you can still offer flexible payment options, but you have to get creative.
Using credit insurance, like that offered at Export Development Canada (EDC) and commercial banks, can help ensure your losses against overdue or incomplete payments:
Your commercial bank can also help you structure contracts so that customers have the flexibility to pay when they want and you can continue to operate your business without interruption from lack of cash flow.
HBSC has experience in this area, which their experts explain in this series of videos:
Cash in Advance
For you, this is the fastest and most secure form of payment.
This however puts your buyer in a difficult situation, since they have no guarantee you will deliver the goods.
Letters of Credit
Letters of Credit (LCs) provide security to you and your buyers. These instruments use banks to receive and check shipping documents to guarantee payment. The bank is responsible for making sure you get paid, not the buyer.
These documents provide assurance to both parties, however, they need to be accurately filled out and goods need to be shipped on time, or they may be voided.
An LC is payment against documents, completely independent of the actual delivery of goods.
LCs can be confirmed or unconfirmed. A Canadian bank can confirm an LC issued by a foreign bank, ensuring you get paid even if the foreign bank doesn’t.
LCs can be irrevocable, which means they can’t be canceled or amended without your approval.
The most secure LC is confirmed and irrevocable.
You agree to ship the goods to a buyer, who will pay for them within 30 to 180 days of either shipment or receipt.
This is ideal for the buyer, who receives the goods before paying for them, but it is very risky for you.
Offering a buyer open account can potentially secure a sale for you, but you will want to check up on your buyer’s credit before you do.
Many companies in the U.S. expect open account terms of 30 to 60 days, and firms in other markets can demand account terms of 180 days.
Open Account with Receivables Insurance
A financial institution provides you with accounts receivable insurance so you’ll get your money even if your buyer fails to pay.
This allows you to offer the buyer the benefits of open account payment while taking on minimal risk.
Your Canadian bank send shipping documents to a bank in your buyer’s market, and when the goods arrive that bank presents the documents to your buyer, who then pays the bank before receiving the goods.
This provides security for you, and your customer doesn’t have to pay until the goods arrive at customs.
This is called documents against payment, and is inexpensive compared to an LC.
An alternative to this is documents against acceptance, which allows the buyer to pay within a specified number of days of the documents being presented by the bank. This provides the buyer with credit for up to 180 days at your expense, and allows the buyer to receive the goods before paying for them. This is a riskier option.
Before you do business with any firm in your target market, you should assess its credit, as well as the quality of its management, its business history, and its reputation locally and internationally.
Legal or consulting firms may be able to assist you with this, as can the Trade Commissioner Service and EDC.
Non-payment becomes a danger if:
Account receivables insurance can help guard against non-payment, delays or contract cancellations. Insurance is available at your bank or EDC:
Facilitating Payments with Foreign Banks