Choosing payment terms and financing solutions for international business

Payment terms and your choice of payment method have a significant impact on the profitability of a sale, depending on how actively you manage your accounts receivable. A sound credit policy starts with assessing and identifying the likelihood and potential consequences of risk. You need a robust credit policy that turns risk into valuable opportunities while protecting the project's profitability. You should also review your customer base annually, act quickly in the event of default and ensure that your partners address this need.

• What type of customer are they – new or unknown?
• The customer's creditworthiness
• country
• The value of the turnover (contract)
• time period
• the nature of the product
• commitments and financing needs

In the market information section on Go Global, you will find guidance on suitable payment methods, such as letters of credit and financial guarantees. You will also find information about potential currency restrictions, credit terms, financing and debt collection practices in every market.

There are several risk factors to consider when your business enters a market and trades with international customers. Here, we highlight the risks associated with decisions about payment and financing solutions. Every situation and sale is unique, so you should assess each one individually to ensure you choose the most profitable option for your circumstances.

Often also referred to as political risk, country risk is one of the social and economic factors that influence a market.

The factors above indicate the extent of corruption, incompetent regimes, revolutions, strained relations with neighbouring countries, and ethnic and religious tensions, among other issues. The social dimension covers social inequalities, education levels, disruptive strikes and similar factors. The economic picture, meanwhile, provides information on the balance of trade, any deficits, debt, inflation, underdeveloped infrastructure and heavy dependence on specific natural resources.

The OECD assesses the risk associated with each country every quarter. You can find these assessments under each market in Go International, as they help you choose the appropriate payment method. You will also find an assessment of the country's level of corruption, updated annually by Transparency International.

Commercial risk involves assessing your customer's ability and willingness to pay. You want to prevent default (such as late or non-payment, or situations where the customer believes the product does not meet the required quality standards) and maintain a healthy cash flow. Do you have sufficient liquidity, and what is your customer's liquidity position?

This means you need to get to know your customer. In particular, it is important to obtain credit information about them. The availability of this information naturally varies considerably from country to country, and we are happy to help you through the market insights available at Sats Internasjonalt.no.

• That the financial statements have been audited in recent years
• Information about any payment defaults (take particular note if there are three or more)
• Consider the company's age and financial growth (bankruptcies are most common among younger companies)
• Media coverage of the company
• Management, legal structure and ownership

It is not always easy to assess a customer's willingness, so it can be useful to gain a better understanding of their value chain. Consider your importance compared with other suppliers or competitors, as well as your customer's customers, to better understand how important your delivery is to your customer's business and profitability.

• Seller/buyer with only a PO box address
• Impressive English company names in non-English-speaking countries
• When there is little or no connection between the product purchased and the industry in which the customer operates
• Buyers experiencing unusually high growth
• A huge purchase for the customer?
• Norwegians living abroad as sales representatives for your company

The key currency risk is directly linked to the payment terms in your contract. If you sell in Norwegian kroner, you face no direct currency risk for that particular sale. However, if the krone becomes expensive for your customer, this may affect future sales. The most common settlement currencies for Norwegian exporters are the euro, US dollar, British pound and Norwegian krone. Whichever currency you choose, it must be convertible. A non-convertible currency generally cannot be used outside its country of origin.

You can and should avoid losing export revenue due to exchange rate fluctuations, particularly as exports account for a growing share of your sales. Currency risk includes transaction risk – the uncertainty caused by exchange rate movements between signing the contract and receiving payment.

If your company has made investments abroad – for example, in manufacturing companies – or has subsidiaries or assets in foreign companies, it holds assets denominated in foreign currencies. If you report your accounts in Norwegian kroner, this creates a degree of foreign exchange translation risk.

It is worth noting that some developing countries, as well as other countries experiencing economic instability, may have or introduce currency restrictions because they have limited access to foreign currency. As a Norwegian exporter, you therefore need to pay close attention to the measures that may accompany such restrictions. Currency restrictions may lead to import licence requirements, customs delays, requirements for currency exchange permits, or the mandatory use of specific banking instruments for payment.

Our market insight data on Sats Internasjonalt can help you find out whether any currency restrictions apply to your market.

There are several ways to manage currency risk, such as using forward contracts, currency options or foreign currency accounts, or selling in Norwegian kroner. Contact your bank to discuss your options and find the solution best suited to your business.

Both the exporter's and the importer's banks play a role in facilitating key payment solutions or instruments. The banks will often help mitigate risk, extend credit on behalf of the exporter and/or importer, and provide the full financing package.

Bank risk arises when your bank is unwilling to deal with your buyer's or seller's bank, or will only do so indirectly and on restrictive, costly terms. In practice, larger commercial banks have a network of correspondent banks in other countries, so it may be worth taking the time to find out which banks these are and discuss this openly with the buyer.

If the goods have already been produced and the buyer breaches the contract or becomes insolvent during the production period, you may find it difficult to sell the product to another customer without incurring significant additional costs. This risk increases when the product is highly customised or seasonal, or when you sell fresh produce. The risk also increases if you have started an unusually large production run or overlooked regulatory product or certification requirements for entering the market.

To manage country (political), commercial and product risk in particular, you as an exporter can require advance payment, payment by documentary collection, a letter of credit or financial guarantees from a bank. You can also supplement these with an export credit guarantee from GIEK (where you can offer the buyer a loan through Eksportkreditt and other commercial banks) or various credit insurance companies, and/or sell your receivables to a factoring company.

Read on to learn about these different payment methods and risk mitigation instruments.