Analyzing Global Payment Tools Available to Exporters

Like her products, Kimberly Parry’s business grew organically. A lifetime gardener, Parry began developing her own skin products more than a decade ago after store-bought skin creams agitated her daughter’s sensitive skin. After much research, she found that most of those creams, even those claiming to be all natural, included additives. She then created her own organic versions. Friends noticed and then friends of friends noticed.

Her business grew steadily by word of mouth, and in 2004, Parry left behind her 15-year career in corporate HR to head up Kimberly Parry Organics. Coming from the corporate world, Parry understood not only the potential revenue from foreign markets but the risk-diversification benefits as well. “When you sell to other markets, you spread your risks,” she explains. “If one market slows down, then you can count on the other markets to take up some of the slack.”

She also had reservations, particularly when it came to finding reliable partners and proper payment channels. “You need to have a payment plan in place because once your products leave the port, it’s very difficult to get them back.” Luckily, she had help. “There are many people stateside who can confirm whether potential partners and distribution channels are viable.”

For Parry, one of those people was Travis Cloyd, founder of Hawk Exports. A former college football player, Cloyd began his career selling nutritional supplements. He quickly noticed that the most successful salespeople were tapping foreign markets to boost their sales. He began exploring these overseas markets and gradually built on the knowledge he gained to found his own export consulting business.

Cloyd offers this advice to companies with ambitions to export: “Don’t just wing it. Make sure you have a game plan.” That game plan should be market specific and built on strong relationships, according to Cloyd. “It’s not what you know, but who you know that knows what you want to know. Having someone from a market with connections and resources will make it much easier to open doors.”

In Kimberly Parry Organic’s case, Cloyd helped the company establish a joint venture in India and find distributors in Japan. In March, Kimberly Parry Organics will display its products at the world’s largest beauty and cosmetics show in Bologna, Italy, after being selected by the state of California from a large pool of candidates. The company also sells to domestic and international customers through its online store.

Parry is not alone in her international ambitions. According to the U.S. Commerce Department’s Exporter Database, almost 293,000 companies in the United States exported merchandise in 2010, the most recent year for which data is available. Of that number, 98 percent were small- and medium-sized companies, and almost 60 percent exported to only one foreign market.

For companies looking to venture into a new market, non-payment is one of the greatest risks, especially for large orders provided by small companies. The unfamiliar regulatory environments and business cultures can complicate efforts at collection. Partnering with a bank can reduce these risks of non-payment, according to Cloyd. “Getting money is a full-time job in itself. If we can make it easier on the buyers by using banking solutions that they are familiar with, then we will use them.”

Robyn Todd is the vice president and Pacific region manager for Global Treasury Management at U.S. Bank. She explains, “Your banker can talk in detail about what we see as payment methods used in that industry in that country, and help you analyze the consequences of one payment method over another, in terms of timing elements, effect on cash flow and availability of financing.”

One of the most common international payment methods, one which greatly reduces non-payment risks, is the letter of credit. In such agreements, banks are responsible for making sure that full payment is received on schedule. At the same time, the buyer can notify the bank to withhold the payment if the products are not received or do not meet the proper specifications. In this way, letters of credit protect both buyers and sellers. They can be expensive, however.

Exporters can avoid those costs by billing directly, known as an open account. In such cases, the companies first ship their products, and then wait for the buyer to pay, often 30 to 90 days later. Open account options are more dangerous for the exporters because, as Parry points out, it is difficult to get products back if the buyer does not pay. The lag time between shipment and payment can also affect cash flow. Banks can assist in facilitating open account transactions, but they rarely take on risk related to non-payment, largely because the rules governing such transactions vary from country to country.

That is beginning to change. The International Chamber of Commerce and financial messaging service SWIFT are working on a new payment option, called a Bank Payment Obligation (BPO), that standardizes international practices and improves transparency in cross-border transactions, allowing banks to offer a wider range of open account options to reduce non-payment risks.

Banks also offer products to reduce the risks suppliers face due to currency issues. As exchange rates fluctuate, exporters may find that the value of the payment falls as they wait for the buyer to pay. Banks offer some products to reduce those risks, but other currency risks exist, even for dollar-denominated transactions. Drastic shifts in exchange rates could prevent normally reliable buyers from paying, and at the same time, companies may lose price advantages by billing in U.S. dollars. “Dealing in multiple currencies requires some work, getting up to speed on what the risks are and what the options are for mitigating those risks,” says Todd. “But many companies are doing it successfully.”

Government offices also offer services for companies that are exporting, and banks can help their clients take advantage of those services, according to Scott Barcalow, vice president of Trade Finance at Cleveland-based KeyBank. “Banks have access to export-related resources within the U.S. Department of Commerce,” says Barcalow. “For example, the U.S. Commercial Service offers extensive market research and will even help exporters arrange meetings with new foreign buyers. Banks can leverage these services to offer a better view into the economic and political climate in the markets they’re targeting.” As an example, the government office worked with Kimberly Parry Organics to find distribution partners.

The U.S. Commerce Department not only offers information on tax, regulations and market conditions around the world, but can also find specific industry and company information. In Kimberly Parry’s case, the trade office helped the company identify potential distribution partners. They can also help in direct financing and in forging financing partnerships.

The U.S. Commercial Service can also help in direct financing and in forging financing partnerships. California-based medical equipment-maker American JQ took advantage of such services when the company bid on a contract to supply medical equipment to a hospital in India, where suppliers often provide flexible credit terms and tools such as credit cards are rarely used. American JQ feared cash-flow problems if the company won the contract. The U.S. Commercial Service arranged a special trade financing loan involving direct financing, American banks and foreign entities. The company’s bid was successful.

Technology is another factor that is improving cash-flow conditions for exporters. Tomasz Michalski, professor of Economics at HEC Paris, explains: “The rise of technology has made all the payments faster, allowing information to move electronically and payments to be completed within a few business days, which lowers the working capital requirements for exporters.” It has made transactions cheaper as well, he points out, because it is easier for banks to do such transactions and competition has driven down prices.

Technology is also improving information flow and transparency across borders, allowing companies to better evaluate potential buyers. Several companies, such as Tampa-based Owens Online and Miami-based Cristal Credit, have taken advantage of this transparency to build databases for companies to learn more about potential buyers and partners.

Beyond speed and transparency, technology is opening up new avenues for companies to reach consumers through non-traditional payment methods. Preliminary estimates from the World Payments Report put the total value of non-cash payments in 2011 at $306 billion, up from $286 billion in 2010, with especially rapid growth of 18.4 percent in developing markets. Credit cards are increasingly accepted in such markets, expanding channels for exporters to reach directly to consumers.

The report estimates that e-commerce payments will grow by an average annual rate of 20 percent from 2009 to 2013, while the growth rate for mobile payments will top 50 percent in coming years. Paypal, Xoom and numerous other non-bank providers are taking advantage of the interest in electronic and mobile payments to capture some of the payments market.

Some such services offer specialized services tailored for specific types of payments. As an example, the company Tiaplti automatically updates tax and regulatory information for all its payments, simplifying compliance issues for its users. Peertransfer specializes in international tuition payments. Other companies, such as China’s Alipay, have grown into leading online payment companies in their home markets.

“The non-bank payment providers tend to be very focused because they know the local markets,” says Elizabeth McQuerry, consultant at Glenbrook Partners, a payment strategy consulting firm. “Their product set is often more narrow than the big banks but also tends to provide more services within that focus than a bank might.”

Companies involved in international trade can utilize these non-traditional methods for their payments, but they should first understand their markets and their target customers, according to McQuerry. “It is easy to get the impression that the economy is globalizing and that is true. But that does not mean that it is the same in every country. The country-level differences do matter a lot in terms of your strategy and your success.”