Knowledge Centre

1.1 Assess your negotiating strength.

The customer is usually in a stronger position than the supplier.

If you are dealing with large businesses, either as customer or supplier, you might have to agree to their terms or lose the deal.

1.2 Identify any normal practice you should follow.

Some countries have legal restrictions, such as foreign exchange controls, which you must comply with.

Within the EU, most established businesses expect to deal on open account in much the same way as within the UK.

1.3 Assess the risks, and decide how much risk you are prepared to accept.

You may be prepared to use a less secure payment method if you know and trust your customer (or supplier).

It can be difficult to recover goods or money through the courts if your counterpart fails to fulfil their obligations. You may want to assess their creditworthiness and reputation, and to research their country's business environment.

1.4 Consider your financing position.

If your financing costs are lower than your counterpart's, it may make sense for you to take on more of the financing burden (and negotiate a price that reflects this).

1.5 Decide whether you are prepared to invest in setting up systems.

You may need to invest time and money to be able to deal with foreign currencies or complex payment methods. You might not want to do this for a one-off export or import.

Being more flexible can increase your competitive edge and may allow you to negotiate better prices.

2.1 Consider payment on open account.

Open account favours the customer. Under this arrangement, the goods are sent to the buyer without guarantee of payment. The supplier bears all the risk of offering credit and needs to finance the whole of the transaction.

Payment on open account is common within the EU and when the customer has an established relationship with the supplier.

Check what normal credit terms are and make sure both parties are clear on when the credit period starts (typically, from the date the goods are despatched and the invoice issued).

Check what normal payment practice is: in some countries, late payment is routine; in others, a late payer may face penalties. If you are the supplier, plan in advance how you will chase late payment.

2.2 Consider using a documentary collection.

The supplier draws up a bill of exchange, specifying when payment will be made. The customer becomes legally liable for payment once they accept the bill.

Documentary collection is less risky for the supplier, who retains ownership and control of the goods until the customer accepts the bill. The supplier will have a strong legal case if a customer fails to pay a bill they have accepted.

The bill can require payment immediately or after a specified credit period ('term'). Once a negotiable bill of exchange has been accepted, the exporter can sell it to a third party (typically a bank) to raise finance.

2.3 Consider using a documentary credit.

The customer arranges a letter of credit with their bank. The bank agrees to pay the supplier once they have provided all the specified documentation (and after any agreed credit period). The supplier can also ask his own bank to confirm the letter of credit, agreeing to make payment if the customer's bank defaults.

Documentation required typically includes transport and insurance documents showing that the correct goods have been despatched, and the invoice. It is essential that the supplier provides complete and accurate documents (see section 6).

The supplier can use a term letter of credit to raise finance in a similar way to a negotiable bill of exchange.

Documentary credits are typically used when there is no existing relationship, or when the customer (or the customer's country) presents particular credit risks.

2.4 Consider using payment in advance.

Payment in advance favours the supplier. The customer bears the risk that the goods will not be delivered, and all the financing costs.

Payment in advance is typically used for low-value sales to individuals or new customers.

2.5 Agree how funds will be transferred.

Take into account the costs each of you will have to pay, how secure the payment method is and how quickly payment can be made.

Electronic payment systems are fast, straightforward and secure.

A banker's draft or international money order can be cheaper, but takes longer and is less secure.

It is usually expensive for a supplier to cash a cheque from a bank in a foreign country.

2.6 Decide what insurance you need to arrange.

If you are exporting, consider taking out credit insurance against non-payment. The level of risk depends on the payment method you have agreed.

The terms of trade you have agreed should specify how responsibility for insuring the goods in transit is shared between supplier and customer.

3.1 Ensure that the price reflects what you have agreed.

Your contract should specify exactly what each of your responsibilities for transport and insurance are.

The payment method and credit terms you have agreed determine how the financing burden is shared between you.

Your administrative costs and risks will also be affected by the payment method and by whether you are using a foreign currency (see section 4).

Make sure that you agree who is responsible for any bank charges.

3.2 Make sure your agreement clearly states who is responsible for taxes.

It is common practice for each party to be responsible for their own country's taxes, but you can agree something different.

4.1 Be prepared to negotiate payment in a foreign currency.

If you are exporting, most customers prefer quotes and invoices in their local currency. They may not be prepared to buy from you otherwise.

If you are importing, you may have access to a wider pool of suppliers if you are prepared to pay in their local currency.

Willingness to trade in a foreign currency can help you to negotiate a better price.

You can convert sterling into foreign currency (or vice versa) when you need to. A 'spot' foreign exchange transaction typically takes effect two days after you arrange it.

The cost of a £100,000 transaction in a widely used currency (such as the euro) might be 0.5 per cent. The percentage cost is higher for small amounts.

4.2 Consider opening a foreign currency account.

A foreign currency account can be convenient and cost-effective if you regularly deal in a foreign currency. Your bank is likely to offer accounts in major currencies such as the euro and the US dollar.

You can hold foreign currency balances in the account, and use any foreign currency income to cover any foreign currency payments you have to make.

Holding balances in the account and only occasionally converting sterling into foreign currency (or vice versa) can be more cost-effective than carrying out a separate foreign exchange transaction for every payment.

If you regularly deal with customers or suppliers in a particular country, you may want to open a bank account in that country. This can make it cheaper to make or receive payments.

4.3 Protect yourself against the risk of changes in the exchange rate.

You are at risk from the moment you agree a purchase (or sale) in a foreign currency, until you have converted that amount of sterling into that currency (or vice versa).

You can fix the exchange rate by entering into a forward foreign exchange contract with your bank. You agree to buy (or sell) the foreign currency at a fixed price on a fixed date.

Alternatively, you can buy an option giving you the right - but not the obligation - to buy (or sell) foreign currency at an agreed rate on a particular date. You only use the option if it is to your advantage.

The costs of a forward foreign exchange contract are typically at a similar level to a spot contract. Fees are fixed or charged by percentages.

Your bank can advise you on the best strategy for your circumstances.

5.1 Identify your financing requirement.

Extra working capital is required in international trade, to cover the delay while goods are being shipped. The customer, the supplier or both may need to arrange financing to cover this.

Your share of the financing burden depends on the payment method you have agreed and how long a credit period it includes.

5.2 Consider basic financing options.

You may choose to use an ordinary loan or your overdraft facility.

Other options can be more cost-effective or provide access to greater amounts of working capital (see below).

5.3 If you are exporting, consider what other options may be open to you.

You can sell a negotiable term bill of exchange once it has been accepted by your customer, or use it as security for a loan. You can use a letter of credit in a similar way.

Unless your customer is very creditworthy, your bank may require the bill to be endorsed (ie guaranteed) by someone who is - such as the customer's bank. There is usually a charge for this.

Alternatively, an export factor can lend against invoices, and usually lends a higher percentage of the value of the invoice than a bank would - up to 80 per cent. Export factoring is usually only available for countries where your annual exports are at least £100,000.

5.4 If you are importing, check whether there are any specialist finance packages available.

Businesses usually finance imports using loans and overdrafts. However, you may get a more favourable interest rate by dealing with your bank's international trade department (for example, at the same time as arranging a letter of credit).

If you use an agent to handle your imports, they may offer specialist import financing packages: for example, financing VAT and import duty.

5.5 Take advice from your bank or financial adviser.

Compare charges and interest rates for different forms of financing to see which is most cost-effective.

Depending on your circumstances, your adviser might be able to suggest other alternatives.

6.1 Ensure you understand what is required.

Keeping full records is vital as they can help you with tax, VAT and duty queries.

You may want to take advice from Business Link or your bank.

6.2 If you are importing, specify what paperwork you require.

If you are buying from a supplier in another EU country, documentation requirements are generally minimal. Your goods should be accompanied by a commercial invoice giving the VAT numbers of both supplier and customer.

If you import goods worth over £600,000 a year from within the EU, you will need to complete an Intrastat return. Intrastat is the system for collecting statistics on the trade in goods between EU member states.

If you are importing from outside the EU, you are likely to need copies of the invoice and a copy of the transport document.

Depending on the goods and where they are from, you may also need other documents. For example you might need an import declaration, a valuation document, a certificate of origin and an import licence.

If you are arranging a letter of credit, it should specify what documents you require.

6.3 If you are exporting, provide any paperwork you are asked for.

If you are exporting to a country outside the EU, UK Customs will require a customs declaration and copy of the invoice before they clear the goods for export.

Export invoices generally need more detail than those for UK sales. Some countries have specific requirements: ask your customer, Business Link or trade adviser.

Incorrect documentation causes delays. With letters of credit, incorrect documentation can effectively invalidate your security.

6.4 Consider getting help.

If you are using a freight forwarder, they can handle much of the paperwork. Make sure you have a clear agreement on who is responsible for what.

6.5 Ensure that you make (or receive) payment when and how you have agreed.