Whether you're doing business internationally or at home, success ultimately comes down to getting paid. But billing overseas customers involves more risk. Walter Ferrier, professor of global management at the University of Kentucky in Lexington, recommends keeping these five risk areas in mind when deciding how and when to bill international customers:
1. The customer: Is this a onetime deal? Do you sell to the customer periodically or on a regular basis? Depending on your answers, you may want cash in advance, a letter of credit or a revolving account.
2. The currency: Currency fluctuations may adversely affect your profits. "The risk can be hedged a little if you stipulate a currency/price adjustment scale [with your overseas customer]," says Ferrier. "For example, if the dollar and the deutsche mark differed by more than 10 percent, the price would correspondingly change by 10 percent."
3. Method of payment: If you're looking for cash in advance, remember that foreign companies have little incentive to do this. Letters of credit--bank-to-bank transactions that substitute for a lack of credit or the trust between exporter and importer--are more commonly used.
4. Timing: How long are you willing to wait for payment? The longer you wait, the more risk there is in terms of currency fluctuations and your customer's financial condition.
5. Competitive factors: A lot of exporters are afraid to bill in the customer's currency. But billing them in U.S. dollars makes them bear the currency risk. Asks Ferrier, "If your customer gets a better deal from a company that will bill them in their own currency, why would they do business with you?" Understanding foreign currency markets gives small businesses a competitive advantage.