A purchase order for your product has arrived from a buyer located outside of the U.S. This is a great opportunity for your company, but the international customer is asking for 30-day payment terms. How do you mitigate the risk of nonpayment? Start with these 5 tips for basic credit checks and export credit insurance protection.
Supplier or Trade References
While your customer's financials can show a healthy cash flow, references from other suppliers exhibit how they have been actually paying their invoices. Some companies do a wonderful job at balancing a bank line of credit, with supplier credit, with end-customer payments – and some do not. By asking your customer for the name/email of 2-3 other suppliers that already grant them credit terms (net 30, etc.), you will be able to get a picture of how they manage their debts. Rule of thumb: most international customers do not pay on the invoice due date and its customary to consider a supplier reference “prompt”, if they pay the other supplier within 30 days after their due dates.
A Trade Reference Form is very easy to create. Elements include:
- Name of Company Giving Reference
- Name of Person Giving Reference
- Years of Experience with Buyer
- Estimated Annual Sales to Buyer
- Terms of Sale
- Highest Credit Outstanding and Repaid within the Past 12 Months
- Date of Last Sale
- Current Outstanding Balance
- Balance Past Due
- Payment Experience – Prompt, 30 days slow, 60 days slow, 90+ days slow
Commercial banks and lending sources follow much stricter privacy laws than ever when releasing information about their customers. With a signed release or credit application from your customer, the bank may be willing to share information with you such as whether they have a line of credit for daily operations or not. This can help determine whether your customer has access to capital in order to pay you, should they need time to float their own receivables while they await payment from their end-customers.
Here is a sample bank reference form:
SAMPLE BANK REFERENCE LETTER
RE: Credit Reference for [Company]
Account # ________________________________
To whom it may concern,
The above mentioned company has filed a credit application with [Company] and listed your bank as a credit reference. With their Credit Application, the applicant has given us authority to contact the listed references and receive information regarding their credit history. Please find attached a copy of their Credit Application that has your bank listed as a bank reference and authorizing [Company] to receive the requested information.
We are looking for the following information:
1. What is the length of time that [Company] has had an open account with you?
2. What is the average daily account balance?
3. Is there a history of overdrafts on this account?
4. Do you have any open loans on your books with [Company]? If yes:
- What is the outstanding balance? Available credit?
- Is the loan secured? What is the collateral?
- When is the maturity date of the loan?
- Has the repayment of the loan been on schedule?
- Has [Company] been a good banking client?
Thank you very much for your assistance.
[Your Name, Title]
These reports are third-party confirmation of the year your customer was established, whether they have any lawsuits or judgements against them, the ownership breakdown of the company, what address(es) they operate at, and could go into more depth the longer the company has been in business. The agencies who provide these reports operate worldwide, and some are regionally focused. Additionally, the U.S. Commercial Service has a version of this report called the “International Company Profile” or ICP report (we are Government and we love acronyms). While this method of obtaining customer information bears a cost, it could save you a costly mistake by selling to a company you did not know well enough. Scenario: you find out in the report that your customer transships to Syria, a U.S. trade embargoed country. Perhaps the customer was not forthcoming with that information in the beginning.
If your customer is asking you to open a line of credit for them, it could be compared to them asking a bank to open a line of credit for them. A bank would ask them for their “most recent year-end balance sheet and profit/loss statement (aka income statement)”. While your customer may want to keep confidential their ultimate financial position, a customer who plans to build a long and strong relationship with their supplier, should be willing to share their company financials when you ask for them. This may not apply to a credit limit of $100,000 or less let’s say, but more suitable for higher credit limits. Some basic analysis that you can run on the financials to determine the position of the company is here.
Export Credit Insurance
You did the best you can, but just in case!!
Even after you find a positive outcome to your analysis of these credit checking methods above, you may still decide to have some back-up for your credit sales to your international customers. There is always a political risk of doing business in other countries too. Or should the owner of your customers business pass away, is there a succession plan in place to keep things running for example?
EXIM can offer you export credit insurance to protect your receivables against nonpayment risks. Whether it’s for one customer, or your portfolio, call a trade finance specialist today to talk about your options: