The rule that orders the decision
Every payment instrument sits on the same axis: the more it protects you, the more it costs your customer in money, in paperwork or in working capital. So there is no good option: there is one proportionate to the risk of each transaction.
And there is a rule that simplifies almost every case: never lose control of the goods and control of the payment at the same time. While you hold one of the two, there is room to manoeuvre. Once you have delivered the goods and not been paid, all that is left is to chase.
Risk is measured by three things, in this order: how much track record you have with that customer, how the order compares to what you can afford to lose, and which country they are in — because there are destinations where suing is not a realistic option.
The five instruments
| Instrument | It protects you | It costs the customer | When |
|---|---|---|---|
| Advance payment | Completely | Financing the whole order | First order, small amount, risky destination |
| Deposit + balance against documents | A lot | Financing part of it | First order of medium value: the usual balance |
| Documentary collection | Quite a lot | Little: bank charges only | Known customer, sea freight |
| Letter of credit | Almost completely | Fees and a bank credit line | High value, new customer, difficult destination |
| Open-account transfer | Not at all | Nothing | Customer with a track record and, if anything, credit insurance |
How to decide
- Look at the track record, not the rapportA customer who has paid six orders on time is data. A good conversation at a trade fair is not. With no track record you start at the top of the table and work down as it builds.
- Put the amount in contextThe question is not “how much is the order worth?” but “what happens to my company if this is not paid?”. If the answer is serious, the instrument has to be a banking one.
- Look at the countryThere are destinations with exchange controls where the problem is not the customer’s willingness but obtaining the currency. There a confirmed letter of credit stops being expensive and becomes the only thing that works.
- Negotiate what you give in returnAsking for hard terms without offering anything loses orders. A deposit is offset with an early-payment discount; deferred terms are granted in exchange for volume or exclusivity.
The ones that cost a whole order
- Loading with the deposit “sent”An international transfer can take days and can be returned. The test is funds credited to the account, not the receipt emailed to you.
- Sending the B/L originals to the buyer when you collect against documentsYou are handing them the goods. If you collect against documents, the originals travel through the banking channel.
- Accepting a letter of credit without reading itThe bank pays against documents that comply literally with what the credit says. A date or a description you cannot meet becomes a discrepancy and a delay.
- Granting terms out of fear of losing the orderAn unpaid order costs more than an order not taken: you lose the goods, the cost and the time spent chasing it.