Need a Competitive Edge?
Consider Flexible Payment Terms
In this first of a three-part series, you’ll learn how offering flexible payment terms can help you attract new customers, and how to choose the right payment strategies to control the risks. Later, we show you the pros and cons of common types of payment terms and how you can use credit insurance to offer competitive terms without restricting your cash flow.
In this article, learn the questions to consider to help guide your decision-making:
Offering flexible payment terms can give you a competitive edge with your international customers. But if your terms are too lax, you may not only increase your risk of late payments and non-payments, but reduce your cash flow to the point that day-to-day operations and growth are compromised. So how you can choose payment strategies that will attract overseas buyers while keeping your financial risks under control?
Flexible payment options help tip sales in your favour
The competitiveness of your export business depends on several well-known factors—the quality of your products, your pricing strategy, and customer service, to name just a few. But another factor buyers consider when comparing your company to your international rivals is how flexible you are when offering payment terms.
However, while flexible payment terms can help to increase your sales, the flip side of the coin is that payment terms that are too lenient can increase your risk.
“The most common payment terms in international trade are cash in advance, letters of credit, cash against documents and some form of open account*,” explains Sarah van Wolde, Senior Underwriter at Export Development Canada (EDC). “What you want to do is offer the best terms you can without taking on an uncomfortable level of risk. For you as the exporter, the lowest-risk method is getting your cash in advance, before you even ship the goods. Conversely, your riskiest option is an open account with full payment at some future date, because your customer gets the merchandise before paying for it.”
To best manage cash flow and risk, you need to strike a balance
“The most common payment terms in international trade are cash in advance, letters of credit, cash against documents and some form of open account.”Sarah van Wolde,
Export Development Canada
Nawshad Khadaroo, CCP, General Manager of the Credit Institute of Canada, says that using payment terms to become more competitive can be very successful, but it needs to be done with care.
“You have to maintain a delicate balance in order to be competitive,” says Khadaroo. “The world is a global village and everyone is competing for the same customers, so you have to find a compromise between your risk and your customer’s risk. If you try to put the risk entirely on your buyers, you may scare them off and send them to your competitors.”
Finding that vital compromise means choosing a set of payment terms that will be comfortable for both you and your prospective customer. If the terms are too stringent, your formerly enthusiastic prospect may walk away from the sale. But if the terms are too lenient, you may wait for months to get paid and end up with cash flow problems. Neither result is what you want, so it’s crucial to choose the right payment method for your particular market, customer and transaction.
“You have to maintain a delicate balance in order to be competitive.”Nawshad Khadaroo,
CCP, General Manager of
the Credit Institute of Canada
Learn how you can gain a competitive edge by offering flexible payment terms to overseas buyers, while still keeping your financial risks under control.
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In addition, knowing which payment option(s) to offer to create a competitive advantage—without taking on unnecessary risk—can depend on a number of other factors as well. Ask yourself the following questions to help guide your decision-making.
“Selling to international customers is a good growth strategy for many small businesses, but you need to be aware of the trade-off between opportunity and risk,” sums up Khadaroo. “But if you carry out your proper due diligence and do everything you can to verify the customer’s creditworthiness, the balancing act becomes a little easier.”
*To understand more about different payment terms, see Different Payment Terms: the Pros and Cons.