Trading Overseas? How to Protect Your Cash Flow Against Customer Non-Payment

“Small firms that export tend to be the most profitable and innovative businesses.”

Winning your first overseas customer is an exciting milestone.

Whether you’re exporting products, supplying services or expanding into new markets, international trade can help your business diversify its income and reach new customers.

If you’re preparing to enter overseas markets, FSB’s guide on how UK small businesses can start exporting explains the practical steps involved before you begin trading internationally.

But before you agree to 30, 60 or even 90-day payment terms, it’s worth asking yourself one important question.

What happens if your customer doesn’t pay?

While most international transactions are completed successfully, recovering unpaid invoices overseas can be more complex than collecting a debt in the UK. Different legal systems, longer payment terms and unfamiliar customers can all increase the financial impact if payment doesn’t arrive.

The good news is that there are practical steps you can take to reduce the risk before extending credit.

Think of credit as lending your money

Every time you offer payment terms, you’re effectively financing the transaction until payment is received.

Most customers pay on time. However, before extending credit, it’s worth asking yourself a simple question:

Would I be comfortable lending this customer the value of the invoice?

Carry out appropriate customer checks

Before offering credit, take time to understand who you’re trading with.

This may include checking:

• the customer’s financial position;
• their payment history;
• how long they’ve been trading;
• whether the business is genuine; and
• how much credit you’re comfortable extending.

Registered FSB members can access 10 complimentary Business Credit Grade Checks, powered by Allianz Trade, helping you make more informed decisions before offering credit to a limited company.

Customer circumstances can also change over time, so reviewing existing customers periodically can be just as important as checking new ones.

Set payment terms that work for your business

Clear payment terms help reduce misunderstandings and establish expectations from the outset.

Before work begins, consider agreeing:

• payment due dates;
• the currency of payment;
• whether a deposit is appropriate;
• stage payments for larger contracts; and
• what happens if payment is late.

Having these conversations before goods are shipped or work begins is usually much easier than resolving disagreements afterwards.

Don’t let one customer dominate your cash flow

A major overseas order can be an exciting opportunity, but it can also increase your exposure. If a significant proportion of your turnover depends on one customer, late payment could place considerable pressure on your cash flow.

Growing your customer base and avoiding excessive reliance on a single customer can help improve your business’s financial resilience.

Could trade credit insurance help?

Even businesses with strong credit management procedures can experience unexpected customer insolvencies or prolonged non-payment.

Some businesses are comfortable carrying this risk themselves. Others decide they’d prefer to transfer some of the financial risk.

Trade credit insurance may help protect your business against certain losses if an insured customer becomes insolvent or fails to pay in accordance with the policy terms.

To understand more about how this type of cover works, read our guide: Is Credit Insurance Right for Your Business? It explores common situations in which businesses choose this type of cover.

Depending on the insurer and policy, trade credit insurance may also provide additional support, such as customer credit monitoring and assistance with debt collection.

Trade credit insurance may be worth considering if your business:

• regularly sells on credit;
• exports goods or services;
• relies on a small number of key customers;
• supplies high-value contracts; or
• would struggle to absorb a significant unpaid invoice.

Whether this type of cover is suitable will depend on your individual circumstances. Terms, conditions and exclusions apply.

Before you accept your next overseas order

Ask yourself:

• Have I carried out appropriate checks on the customer?
• Am I comfortable with the level of credit I’m offering?
• Are the payment terms clearly agreed?
• Could my business cope if payment was delayed?
• Have I considered whether trade credit insurance could help protect my cash flow?

Growing overseas with confidence

FSB research highlights a strong appetite for international trade among UK small businesses.

The Federation of Small Businesses’ Ready to Dispatch report found that 35% of non-exporting small firms would consider exporting in the future.

Separate research published in FSB’s Ticket to Trade report found that 63% of small firms trading with the EU had faced significant barriers.

As businesses look to grow overseas, protecting cash flow remains just as important as winning new customers.

By carrying out sensible customer checks, setting clear payment terms and considering whether trade credit insurance could be appropriate for your business, you can approach overseas trading with greater confidence.

To discuss trade credit insurance or understand whether it may be suitable for your business, speak to FSB Insurance Service on 020 3883 7976.

This content is for general information only and is not intended to provide advice or a personal recommendation. Insurance cover is subject to the terms, conditions and exclusions of the policy. Always consider your individual circumstances and seek professional advice before arranging insurance. External websites are not under our control, and we are not responsible for their content.