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8 Finances

Money is involved as soon as you start getting in touch with a business counterpart abroad. When you sign contracts and start hiring, money starts to flow. At that point, it would be too late to start thinking about the financial risk, this should already have been calculated and provisions made for the risk that is involved in starting a foreign business. Advance knowledge of the financial situation of counterparts is absolutely necessary and this homework should have been done long before setting foot on foreign soil. To receive this kind of information, you can consult your international bank that can give you advice for unusual circumstances in difficult markets. Check the credit of your potential customers. In the United Stated, for instance, you can ask at a department of commerce for an International Company Profile (ICP), which provides information for credit checks. For a fee, you can request an ICP for foreign companies in many countries. It contains financial information on the company as well as facts concerning its size, capitalization, years in business, etc. Other sources of information are banks that provide credit reports or other companies, which have financial information on foreign firms.

8.1 Attitudes toward foreigners and money

Besides getting financial information about a company, you should keep in mind some general attitudes that many countries have concerning money of foreign companies. Foreign companies are not protected in another country. When problems arise, trust, good relationships, and commitment can disappear very quickly. The company may serve as a scapegoat, a target for the frustrations of poverty and political problems. If a foreign company should become very successful, this may also be reason for discontent and new demands for a bigger share of the success may be presented. The rules of contracts and agreements taken for granted in western countries do not necessary apply in other cultures.

8.2 Financing options to think about

Payments can be made in the buyer’s, seller’s or a third agreed-upon currency, which usually is the U.S. dollar, a widely accepted international trade currency. The uncertainty of future exchange rates always brings a risk for the foreign business. An exporter, for example, can either lose or win money when the currencies change between the time the deal is concluded and payment is received. In case a client asks to make payment in a foreign currency, you should consult an international bank about foreign exchange risks.

While importers usually prefer to delay payment until they have received the goods, getting paid as quickly as possible is desirable. However, it is often necessary to offer attractive payment terms to be able to compete in your (export) market.

The following factors are important to consider when choosing one of the many financing options:

Favorable payment terms can make you and your product more competitive. If someone offers a similar product with better terms, you can lose sales.

The cost of different payment methods (interest rates, fees etc.) varies.

The riskier a transaction, the harder and more costly it will be to finance. Political and economic stability also play a role.

In case of large orders, more working capital is often needed in advance.

To find the right option, you can consult your bank or some kind of business administration office. Abroad, you can approach a commercial bank with an international department and try to start a close work relationship with them. They can help you with banking services and advice for your terms of payment.

Some basic methods of payment include cash in advance, a documentary letter of credit, an open account, and other mechanisms like consignment sales. It would be ideal for you to receive cash in advance of the shipment. Commonly used are wire transfers and payment by check. You can also accept credit cards, especially when products are sold directly to the end user. But do not insist in advance payment if you do not want to lose customers, as it might create cash flow problems for them. An open account should only be offered when the customer is well established and has a long payment record.