International sales can mean delayed payment and can carry its own payment security risks. It’s certainly easier to collect in Toronto than in Tokyo, or in New York than Nigeria. International collections usually involve increased delays, administrative burden, legal costs and additional complexity.

So how does one provide payment security for international sales and improve cash flow?

Understanding the payment security spectrum

Let us first review the range of one’s payment security options. The first, “open account”, is most favorable to the buyer and least favorable to the seller. On the other end of the spectrum is “payment in advance”, which is least favorable to the buyer and most favorable to the seller. Here are all five options across the spectrum:

1. Open Account
2. Documentary Collections (Documentary Draft – The Reverse Check)
3. Letters of Credit
4. Confirmed Letters of Credit
5. Payment in Advance – Inclusive of Partial Payment in Advance

You may find the ends of this spectrum to be hard to pitch to either the seller or buyer. With new or unproven customers, the seller will be hesitant to ship goods on open account, with no guarantee of payment. On the other end of the spectrum, few customers are willing to prepay and trust a vendor to ship goods, with no guarantee of shipment.

Note one exception, however. Partial pre-payment (or progress payments) are standard in certain industries. For example, construction companies or large equipment companies may require progress payments at certain stages of a project (e.g., a percentage payment upon issuance of a purchaser order, a further percentage payment upon approved drawings, a percentage payment upon purchase of major materials, etc.).

If you are not in an industry that routinely relies on pre-payment, avoid the extremes of sales on open account vs. prepayment by utilizing a documentary draft or a letter of credit.

Here’s why the documentary draft usually works well for both buyers and sellers

The documentary draft (or bill of exchange, as it may be called) is a special type of negotiable instrument, like a reverse check, that is commonly used to expedite payment. It provides the seller with the security of not permitting the buyer to possess the goods until the draft is paid, or is authorized to be paid.

Moreover, in the event of the buyer’s failure to pay, it permits a seller or the international bank involved in the transaction to sue the buyer, based on the draft alone, without having to prove the terms of the underlying sales contract.

How does the draft work?  The seller ships goods, generates appropriate documents (e.g., commercial invoice, certificate of origin, etc.) and also receives documentation from the shipper (e.g., bill of lading).

We will collectively refer to these documents hereafter as the “title documents”.  The title documents are then forwarded to the remitting bank (the seller’s bank), which in turn forwards the title documents to the collecting/presenting bank (usually the buyer’s bank).

The collecting/presenting bank compares the title documents to the draft’s requirements. If the documentation is in order, payment may be authorized and the title documents are released to the buyer. With the Title Documents in hand, the buyer can then retrieve the goods.

This is a relatively simple and inexpensive payment method. It often provides for more prompt payment than an open account, and the seller has the security of retaining title to the goods until payment is authorized by the buyer.

While this method is more secure than an open account transaction, there is still some risk that the buyer may reject the documents or otherwise renege on the transaction. The banks do not guarantee payment of the draft.

If all else fails, a letter of credit may be better for securing payment

If a seller is unwilling to risk the customer’s potential refusal to honor a documentary draft, they may prefer that a letter of credit is used to secure payment. In this manner, the buyer’s bank guarantees payment and the buyer hasn’t the discretion to reject payment. In this case, the seller must transmit title documents (as defined above) that satisfy the conditions of the letter of credit.

The letter of credit transaction begins with the seller and buyer agreeing to a letter of credit format and terms. For instance, the buyer might call for the letter of credit to require that the bill of lading be negotiable or marked “freight prepaid,” or that the packing slip or certificate of analysis contain certifications as to quality, weight or markings.

The buyer will then request its bank (the issuing bank) to issue the letter of credit in favor of the seller. The letter of credit is forwarded to a bank nearer to the seller’s place of business, and this bank (the advising bank) notifies the seller of its receipt of the letter of credit.

Presuming the seller ships goods prior to the letter of credit’s expiration date, the seller generates and obtains the title documents (e.g., commercial invoice, bill of lading, etc.).

These title documents are then forwarded to the issuing bank, which will effectuate payment in the event the documents meet all requirements of the letter of credit. The issuing bank will release the title documents to the buyer, who can then claim the goods.

Similar to documentary drafts, letters of credit may be “sight” letters of credit, where payment is effectuated promptly upon the issuing bank’s acceptance of the required title documents, or “time” letters of credit, which provide for payment some period after acceptance of that documentation.

For an additional charge, the seller may overcome concerns that the foreign issuing bank may not honor the letter of credit, whether for unscrupulous reasons or due to financial solvency issues. This is done by paying for the letter of credit to be “confirmed.” Generally, the seller pays its own bank to confirm (that is, guarantee) payment in the event the issuing bank fails to do so.

When using them, ensure that letter of credit costs (including confirming costs, if applicable) are included at the bid stage so your margins are not later decreased by this amount. Use only reputable banks. Insist upon an irrevocable letter of credit rather than one that is revocable. Ensure that the documents you forward to the issuing bank strictly comply with letter of credit requirements – failing to do so may result in late payment or, in the event of a delay beyond the letter of credit expiration date, possible non-payment. Become generally familiar with the Uniform Customs and Practice for Documentary Credits to understand the rules of the issuance and use of letters of credit.

If you want to expedite international payments and be more assured of payment, use the documentary draft or letter of credit.  Your CFO will love you for it.

The post Show me the money! Securing payment for international sales appeared first on Trade Ready.

Whether or not your relationship with your distributor is about to end, it’s important to start preparing now for when that eventuality occurs.

Would more marriages endure if significant others listed their expectations of one another in writing before going into the relationship?  Are divorces easier to manage where there is a pre-nuptial agreement that both parties approve?

Know exactly what you’re getting into

I can’t offer marriage advice, but I do know the principal-distributor relationship runs more smoothly where each party clearly understands what is expected of them, and those expectations are memorialized in a distributorship contract.

I also know that the principal usually saves significant money when termination conditions are contractually agreed.

The Parties’ Expectations:

• Contract Territory – Explicitly limit the contract territory, whether by geographic area or specific customers. There is no reason to let a vague definition result in a later misunderstanding.
• Independent Relationship of the Parties – Granting the principal extensive control over the distributor’s business methods may initially seem like a good idea, but doing so might result in the relationship being construed as an employer-employee relationship in some countries. This could result in a host of tax, legal and contractual problems.
• Commissions – It is prudent to delay payment of commissions to the sales representative until after the principal receives final payment. It is a far more difficult matter to chase a payment when the customer is on the other side of the globe, rather than down the road.  When a representative is not paid until you are paid, there is a greater incentive for the representative to do the collections work for you.
• Securing Governmental Licenses and Approvals – To avoid the burden of familiarizing yourself with the rules and regulations of each of the myriad foreign countries where you do business, shift this burden to the local distributor.
• Compliance with Domestic and Local Foreign Laws – Don’t run afoul of trade laws in your home country or in the distributor’s country. Contractually obligate the distributor to comply and educate your distributors as to prohibited destinations, customers and product uses, as well as export licensing requirements.

The end of the relationship – when the music dies

We all desire long and profitable business relationships.  Wise international managers, however, have exit strategies and precautions in place.  The termination of a distributor, or the non-renewal of the distributorship contract (which is tantamount to termination in some countries), may result in significant penalties in the form of damages or indemnities.

Additionally, if a principal utilizes the distributorship form, the principal may be effectively prevented from terminating a poorly performing distributor where the principal is not privy to the distributor’s customer list information.

Faced with the choice of continuing with the under-performing distributor or spending years starting anew to build a customer base in the foreign country, some principals find themselves stuck with poorly performing distributors.

Avoiding or at least mitigating those penalties and downsides may be addressed in a number of ways, many of which can be incorporated into the distributorship contract.  For example, consider the following:

1. Choice of Law – Choice of Forum

Many countries have default laws, in the absence of a contractual designation, that provide for the distributor’s country laws to apply.  They may further provide that a dispute regarding the relationship will be heard in the distributor’s country rather than in the principal’s country.

Most, but not all, countries permit the parties to choose applicable law, the applicable venue for dispute resolution and the mechanism of dispute resolution (e.g., arbitration, mediation or litigation).  The wise principal chooses his home country or at least that of a neutral venue.

2. Customer Information

A seasoned distributor will not share end customer information with its principal.  This withheld information provides leverage for the distributor and prevents the principal from “going around” or in some instances from terminating the distributor.

How does the principal get around this?  If a distributor does not agree to voluntarily share this information, the principal might consider making the disclosure of customer information mandatory in those instances where the distributor seeks discounts in addition to the standard price structure.

Alternatively, the principal might provide that the principal’s warranties are extended only to those customers of which the principal is aware at the time of the sale.

3. Term and Termination

Avoid indefinite term agreements and automatic renewals.

The laws of certain countries and regions provide protections to the distributor; laws that provide for significant penalties (or “indemnities”) when a principal seeks to terminate, or opts not to renew the distributor relationship that has either existed for a significant period, or has an indefinite period from which a lengthy intended term may be inferred.

4. Objective Performance Standards

There is no provision in the distributor contract of greater potential financial significance than the objective performance standard.

Requiring the distributor to meet a specific sales volume removes much subjectivity from the contract, and keeps courts from conducting an after-the-fact consideration of subjective arguments distributors raise to seek damages from principals.

Include a concrete, specific sales volume requirement, and designate the distributor’s failure to meet that volume as a material breach of the distributorship contract.

This will provide the distributor with an objective basis for declaring the contract in breach, not to mention providing an unequivocal standard for the distributor’s performance.  Please be assured that inclusion of this provision will save many future headaches.

Following these suggestions will help you set realistic expectations and avoid potential problems.

Have you had any issues with international distributors in the past? What areas of your contract is the greatest current area of need?

The post 4 ways to protect yourself in international distributor agreements and avoid messy disputes appeared first on Trade Ready.

A well-qualified international distributor finds customers, knows the local language and culture, and can provide foreign services such as obtaining import licenses, clearing goods through customs and performing product installation and warranty repairs.

The international distributor is the “local” face of your organization.

Remember the different types of international sales entities

It is important to understand the distinction among three distribution terms.

The term “agent” may imply more than one simply performing a sales or distribution function.  Indeed, it may indicate authority to obligate the manufacturer (or “principal,” as it is referred to in this relationship) to other persons or companies.

A sales “representative” arranges sales for the principal.  That is, title to goods normally passes directly from the principal to the customer, and not through the representative.  The representative’s compensation takes the form of a sales commission paid by the principal.

A “distributor” usually purchases your product and resells it to the customer.  It is from the resale margin that the distributor is compensated.  Distributors are more likely to carry inventory and to provide after-sale support and service than an agent or sales representative may.

While the terms “distributor,” “representative” and “agent” each have a separate and distinct meaning, not to mention significant legal implications, for ease of reference they will collectively be referred to in this article as “distributor.”

The Dating Game – How do I find my dream distributor?

So how does one find an effective distributor?  There are traditional methods such as reviewing trade publications, obtaining international bank references, soliciting international customer input, etc.

Two methods on opposite ends of the expense/effort spectrum, however, are especially effective.

Assuming one has the financial resources and time, attending a trade show in the region where you are searching for a distributor or distributors is an excellent opportunity to have a first-hand view of their marketing, customer relations and sales efforts.

This is a rare chance to view your potential distributor through the customer’s eyes.  Visit the distributor’s displays and interact with the distributor’s sales personnel.

This “blind date” provides an excellent opportunity to test how they might represent your product or service.

For a more cost-effective, albeit less personal, alternative, consider utilizing the assistance of government agencies.  For example, UK Trade and Investment (UKTI) will assist with international trade advice, including how to find an international distributor.

Similarly, the U.S. Department of Commerce’s Commercial Service provides a Gold Key Matching Service.

For a cost ranging from US$350 for small to medium size companies, to US$2,300 for large companies (defined as companies with more than 500 employees), the Commercial Service will review your list of distributor requirements, vet potential distributors, narrow the candidate list to a handful of the most qualified companies, and arrange your introduction to those companies.

To save travel time and expenses, the Commercial Service will even provide video conferencing services with the potential international distributors.

Keep your hands off my distributor

You may think this too much trouble.  Isn’t it a good idea to simply steal your competitor’s international distributor?

A “hands off” approach may be well advised.  When a distributor leaves one principal for the principal’s competitor, expensive and time consuming litigation is not an uncommon result.

How many units of your product will you have to sell to generate sufficient revenue to pay your attorneys, while the competing principals fight over what constitutes trade secrets and proprietary information?

How many management hours will be taken away from your core business to engage in litigation?

And what about the distributor’s loyalty to your company?  Don’t be naïve.

If the distributor was willing to leave its former principal for a new relationship with your company, don’t be surprised when your distributor leaves your company for the next principal.

The best predictor of future behavior, after all, is past behavior.

Is your company in need of a new international distributor? Which of these steps seems most helpful for your business?

The post You don’t have to play the dating game to find the right international distributor appeared first on Trade Ready.