Wyoming Business Tips for Jan. 29

A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.

By John Privette, WSBDC Network regional director

“Our company is evaluating exporting. How do we get paid and reduce nonpayment risk?” Howard, Cheyenne

More than 300,000 small- and medium-sized U.S. companies are growing by exporting products to foreign buyers. When deciding to export, business owners consider several things including: does exporting align with the company’s growth strategy; do we understand what it takes to export profitably; and, maybe most importantly, how do I get paid?

As with all sales, being paid in full and on time is key to exporting successfully, and, like most negotiations between companies, financial transactions are influenced by local customs, cultural norms and common practices. Asking buyers for cash in advance, for example, is not as common in most of the world as it is in the United States. Offering credit terms to foreign buyers increases risk, but the upside may be a more competitive position in the market and greater growth in revenue. And, products like export credit insurance mitigate that risk.

Domestic sales to U.S. customers with good credit are typically made on an open account; otherwise, cash in advance is required. For export sales, three common methods of payment, listed in order from most secure for the exporter to least secure, are:

-- Cash in advance.

-- Letters of credit.

-- Open account.

-- Cash in advance. On the surface, cash in advance may seem ideal for the exporter. It eliminates collection problems, and wire transfers make payment almost immediate. For the buyer, however, cash in advance increases risk and may create cash flow problems. Exporters who insist on advance payment may lose out to competitors who offer more flexible payment terms.

-- Letter of credit. Versatile and secure, a letter of credit is a commitment on behalf of the foreign buyer that the exporter will be paid when the terms and conditions stated in the letter of credit have been met, as evidenced by the presentation of specified documents. The more secure letters of credit are irrevocable, meaning that they cannot be changed without the agreement of both parties.

-- Open account. Open accounts are advantageous for the importer and can be a viable method of payment for foreign buyers who are well-established, have a proven track record of favorable payment or have been thoroughly checked for credit worthiness. Open accounts are often used in highly competitive markets, particularly if there is strong competition from local suppliers.

-- Reduce your risk. The good news is that there are a number of safeguards U.S. exporters can use to be competitive in international markets while reducing risk. The risk of nonpayment, for example, can be mitigated by trade finance products like export credit insurance offered by commercial lenders and the Export-Import Bank of the United States.

A blog version of this article and an opportunity to post comments are available at www.wyomingsbdc.org/blog1/.

The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email wsbdc@uwyo.edu, or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.