A lead is about to become a brand new customer. Maybe, but you have to get the order and close the deal. If it is a brand new customer to you that means for them your firm is a brand new supplier. Both of you face risks in closing this transaction.
Suppose your new customer places a big order. Do you demand payment up front or extend some form of payment terms? Your risk is reduced with an up front payment, but theirs increases as they don't know if you'll actually deliver as promised. In the domestic market, credit cards offer buyers some protection if firms fail to deliver, but not all orders can be placed on credit cards. Contracts and legal systems offer some protection too but collecting that way can get expensive quickly.
If the customer is from another country, and you as the seller are demanding cash up front in U.S. dollars when the order is made, you have just placed all the risk on potential buyers. They have to trust you to deliver some day product for which they are paying current U.S. dollars to sell at some future date in their local currency. What if you fail to deliver as promised? What if the exchange rate fluctuates significantly between the time they pay you and the time they can actually sell products in their market?
That buyer can take this potential business to another seller who is willing to extend terms and accept payment in the local currency. And that competing firm may be taking no more risk than you would be selling for U.S. dollars in advance. That's because your rival firm has insured its payment risk through a government-sponsored program and used some form of hedging (probably a forward contract) to mitigate the exchange rate risk.
The governments of most industrialized countries are vigorously engaged in export-promotion activities. In the United States, some of those services are offered through the Export Import Bank (Ex-IM Bank). The primary mission of Ex-Im Bank is to finance exports, a topic for future articles. But an important secondary mission is to reduce exporters' risk, primarily by offering export credit insurance. The insurance covers the risk of non-payment for commercial reasons (for example, the importer goes bankrupt and can't pay) but also for some political risks, such as war or currency turbulence.
Insurance can be purchased for a single buyer on a single transaction or for multiple transactions with multiple buyers. Special programs exist for small businesses. Visit www.exim.gov for more information on export credit insurance. Your local offices of the Small Business Administration can help you access this program. Commercial export credit insurance may also be available for some types of transactions.
For firms not ready to purchase export credit insurance, other possibilities for managing payment risk include documentary collection and letters of credit. Documentary collection in essence moves the time of payment to when the goods are actually delivered. The documents holding title to the shipment are exchanged for payment. A letter of credit involves bank guarantees of payment, and again documents become an important part of getting paid under those programs.
Trying to win new business is about offering something better than the competition. If your foreign rivals are consistently offering better terms than you are, your potential market size will be limited. Utilizing programs such as export credit insurance may be just the competitive edge your firm needs to increase its international sales without increasing risk.