Secure business abroad: protect your claims

There are a wide variety of payment terms available to exporters. Examples include prepayments (certainly the most favourable payment term), invoices secured by bank guarantee, letters of credit and bills of exchange. Particularly with new export clients or dealings with remote or "difficult" countries, it is recommended to agree on at least a partial payment of about 20%. Firstly, this will free up some of your budget and secondly, it will test the customer’s willingness to pay as well as their solvency.

Delivery abroad on an open account or bill of exchange is like unsecured loan. For your clients this may be the most favourable situation, but it leaves you carrying the whole payment risk. This is why open trade credit should only be used in cases of great trust or well-rehearsed business dealings.

In practice however, full prepayment is very rare. Given the financial situation of most companies, especially in the developing and transformation countries, you can assume that during contract negotiations you will be confronted with a request for a term of credit. In such a case, claims may be secured by an irrevocable confirmed letter of credit or export insurance. If payment by letter of credit is agreed upon, the credit terms must be clear and unambiguous and accomplishable for both contracting parties.

With additional security, you can grant a term of credit to customers who pose a certain element of risk. However, if you don’t want to take any short-term risks at all, you can always sell your foreign receivables to an export factoring company and the original credit transaction will turn into a cash deal. Approximately 10% - 20% of the claim amount is retained by the factoring company until the contract of sale is completed. The fees amount to approx. 2% of the secured claim plus the usual bank charges for advance finance. It is advisable to check in advance whether the cession of claims is generally possible in your customer’s country.

When you are wondering whether to accept a foreign order, you should not only take the client but also the client’s country into consideration. Besides the financial risks, there are also political risks concerned with exporting. Financial risks can be reduced by examining solvency, but political risks exist in different regions and your business partner has no influence over these. In general, economically and politically unstable countries are vulnerable. The Euler-Hermes Kreditversicherungs-AG, which awards state-run export insurance coverage for Germany, lists a number of countries which do not belong to the OECD (Organisation for Economic Cooperation and Development). This basically means those countries which do not belong to the EU, EFTA region, USA, Canada, Japan, Australia and New Zealand. When carrying out business dealings with such countries, loans may be secured by national export insurance (www.ausfuhrgewaehrleistungen.de).

Agreement on payment terms is also an important element of cross-border business dealings and you should pay absolute attention that “Incoterms” are applicable. These are internationally recognised terms which define the mandatory costs and risks to be carried respectively by the exporter or importer. In order to prevent misunderstandings, you should explicitly refer to the updated version, currently "Incoterms 2000".

When delivering abroad, German companies primarily like to rely on the well-established domestic rule of retention of title. However, outside of Germany this rule is losing recognition and often it can not be enforced in contract agreements. German law is only applicable as long as the goods are located on German soil. Favourable legislation is very rare: Take Latvia, for example, where the buyer has no legal entitlement to the unpaid good when a term of credit has not been granted. Abroad, ownership passes over to the buyer mostly on delivery or mutual consent (signing of the contract). And even when the retention of title is considered in the national jurisdiction, it is nevertheless ineffective in many cases. In Luxembourg for example the legislator provides for it, but it can not be used in a claim against third parties nor in an insolvency case, so it practically has no significance at all. Mentioning the general business terms and conditions is hardly sufficient in any single case. In order to have any chance of recognition, these types of claims must be explicitly agreed upon in the contract of sale!