International business can offer great opportunities for growth and expansion, but it also comes with its own unique set of challenges. One such challenge is the payment process. Getting paid on overseas contracts can be complex, time-consuming, and sometimes downright frustrating. There are various different payment methods to consider, currency exchange rates to deal with, and numerous legal requirements to navigate, all of which can delay your payment or risk your ability to get paid at all. Below, we'll discuss some best practices for reducing your payment risk when selling products or services overseas.

Do your due diligence

Before entering into any international contract, it's essential to do your due diligence on your potential client. Research their reputation, financial stability, and creditworthiness. Check if they have any outstanding debts or legal disputes. You can use third-party credit agencies or professional background check services to help you assess the risk in some countries but in many developing countries you may need more local expertise from someone on the ground such as a local partner or business consultant such as ISI.

Choose the right payment method

It is important to select a payment method that fits your risk tolerance but is also realistic for your client. A wire transfer of 100% payment in advance may seem the most attractive to you but will you be able to win business on those terms? There are ways you can offer more flexible terms and still stay protected such as Letters of Credit and Export Credit Insurance (see below). Also, when selling services internationally you may be able to front load the payment schedule, so you are not left with a large outstanding payment after services have been provided and have less leverage. Make sure that you factor in any fees associated with each payment method when deciding which one to use.

Consider using letters of credit

A letter of credit is a payment guarantee from a bank that ensures payment to the exporter if they comply with the terms of the contract. The buyer's bank issues the letter of credit, which guarantees payment to the exporter if they present the required documents. A letter of credit can help mitigate non-payment risk and provide assurance to both parties but there are fees involved so it may not be appropriate for every type of transaction.

Consider purchasing export credit insurance

Export credit insurance is a type of insurance that protects businesses from non-payment risk. It can cover the cost of non-payment, including legal fees and collection costs. Export credit insurance can also provide credit risk assessment and monitoring services to help you assess the risk of doing business with a particular client.

Consider currency exchange risk

When working with international payments, you may need to exchange currencies to receive payment in your local currency. This can be a complicated process, and currency exchange rates can fluctuate rapidly in some markets. To avoid losing money, you should try to get paid in your local currency if possible. Alternatively consider using a reputable currency exchange service to help minimize the exchange rate risk. Be sure to research different currency exchange services and choose one that offers competitive rates and low fees.

Establish clear payment terms early on

Once you have decided on the payment terms you are comfortable with, it's crucial to discuss and clearly establish the payment terms well in advance with your client. This should include the payment amount, the currency, the payment method, and the payment schedule. Making sure that you and your client are on the same page regarding payment terms early on will help avoid any confusion or costly misunderstandings later on.

Use a good contract or payment agreement

Ensure you have a good legally binding document such as a contract or payment agreement in place that outlines the payment terms and conditions between you and your client. A good contract or payment agreement can help protect your interests and ensure that you get paid on time. At a minimum, the agreement should include details such as the payment amount, payment schedule, payment method, and any penalties for late payment.

Invoice accurately and on time

This may seem obvious, but timely invoicing is critical when working on international contracts. With all the potential issues and delays that may be out of your control, you can and should ensure that your invoices are accurate and sent out on time, so your client has enough time to process payment. Make sure that your invoices include all the necessary details, such as your company name, address, contact details, the payment amount, and the payment due date.

Follow up on overdue payments

Even with clear payment terms and timely invoicing, there may be instances where your client misses a payment deadline. In these cases, it's important to follow up promptly, professionally, and regularly. Send a polite reminder email, and always follow up with a phone call as some cultures are not as attentive to email. If the payment remains overdue after multiple attempts to collect, consider escalating the issue to a local collections agency or seeking legal advice.

Work with a local partner or international consultant

Working with a local partner or international consultant can help you mitigate non-payment risk. They can provide local knowledge and support, including credit checks, legal advice, and debt collection services. They can also help you navigate cultural differences and language barriers.

Get good legal advice

International contracts can be complex, and there may be legal issues that you need to consider. It's a good idea to seek advice from a lawyer who specializes in international contracts. They can advise you on payment regulations, tax obligations, and any other legal considerations related to your contract.

In conclusion, getting paid on international business requires careful planning and attention to detail. By following these best practices, you can ensure that you receive payment on time and in full, so you can focus on growing your business and delivering high-quality work for your clients.

How to reduce your international payment risk