How to Deal with Late Payments in the Import-Export Business

Running an import-export business in Africa can be an enormously profitable venture, and it can also be incredibly simple, so simple in fact, that you can run it out of your own home. Examples of how to succeed in import-export business are all over the internet, with articles detailing how much it can cost, or how one can obtain a license for importing and exporting or virtually any other question you might have about how to start your very own. But one thing that is not discussed enough is the risk that accompanies starting your very own import-export business, particularly that you may have to deal with late payments for shipments, or in extreme cases, even no payment at all. This type of thing can be extremely disruptive to a brand new import-export business especially in a growing market like Africa where competitors are waiting to pounce on any slip-up. Fear not, however, you do not need to simply be a victim to this phenomenon, there are different methods of payment, as well as new technologies that can help to ensure that you do not fall victim to late payment tanking your import-export company.

How Payments Work

While it may seem like paying for an import or receiving payment for an export should be an easy affair, it is, in fact, the opposite. There are many different payment options to choose from, each with advantages and disadvantages for the importer and exporter, and each with varying level of risk. The payment terms with lowest risk for the exporter will be the payment terms with the highest risk for the importer, and vice versa. Likely neither of those high risk options will be on the table as one of the parties would likely not accept terms that are so unfavorable to them. The types of payments that are extremely high risk to one party and extremely low risk to the other are known as “prepayment pre-shipment” and “payment post-shipment delivery”. These types of payment are normally done using either a telegraphic transfer or an international check. The only difference is that for prepayment, the importer must pay before the goods are shipped, and for post-shipment, the importer does not pay until after the goods have arrived.

Prepayment Preshipment = importer pays before goods are shipped

Payment Post Shipment Delivery = importer pays after goods have arrived

The other types of payment that are available to importers and exporters are all based on some type of documentation that allows more certainty for both parties involved. One type of mid risk payment is called “Documentary Letter of Credit”. This payment type requires getting a bank involved to pay the exporter on behalf of the importer, so that both can be sure that what is being shipped meets the terms and conditions agreed upon. A Documentary Letter of Credit payment leads to low to medium risk for the exporter, because they can be reasonably sure that they will receive payment as long as they fulfill the terms and conditions set forth by the bank. For the importer, this type of payment represents a medium level of risk, as you cannot be completely certain that the goods have been shipped before payment is rendered. This kind of payment is also more logistically complicated than the simpler high risk payment types, as an agreement has to be made with a bank in order for it to work, which brings a third party into the situation, who not only must be paid but must be brought in on the planning.

Another type of medium risk payment option is called “Documentary Sight Collection.” In this type of payment, the exporter is paid after the goods are shipped, but before the importer is allowed to receive the documentation that would allow them to receive their shipment. In theory, this would allow the importer to see that they had, in fact, received the ordered product before paying and also ensure that the exporter is paid in a timely manner. In reality, however, this does not always work out, because the freight company may give out the product without documentation, and therefore without payment. This is especially common with air freight companies. Documentary Sight Collection is considered a medium risk to both parties, and therefore quite desirable, especially if the freight is being shipped via sea.

A third type of medium risk payment is known as “Documentary Term Collection”, which is basically the same as documentary sight collection, but with one small twist that makes it more favorable for importers. The difference is that with this style of payment, the documents needed for receiving goods shipped are released when the importer undertakes to pay at a later date. This creates more risk for the exporter, because if there is a mix up with the payment, then the importer will have already received the goods and not be motivated to try to pay again.

Why Payments May Be Late

There are many reasons why payment may be late, especially if you are dealing with a payment method like Payment Post-Shipment Delivery, or Documentary Term Collection. One reason is simply that upon receiving the goods, the importer may not have the liquid funds to pay the invoice and will need to wait until they do have these funds. Another instance where payment may be late is if there is some kind of dispute over whether the items shipped were what the importer requested, in which case they may try to avoid payment until the dispute is settled. In a more extreme case, the importer may renege altogether on the payment. Because the cost of international litigation is so high, it may be difficult to sue in order to receive the payment that you deserve as the exporter.

How This Affects African Businesses

The impact of late payment to suppliers especially affects African businesses and business owners for several reasons. Firstly, because of the volatility of many African currencies compared with that of nations overseas, it may be difficult to get what you were owed if currency exchanges are required. The best way to combat this is to make sure that you are paid in your own currency, but that may be difficult because an international company may not want to deal in a more volatile currency. Another reason that African business owners are hit particularly hard by this is that Africa is an emerging market, so there is nothing but growing opportunities for people in the import-export business. While this can seem like a good thing, it does lead to two big problems, namely, a lack of legal framework and resources, and high levels of competition. Because this market is so new, those practicing law and even making the law will inevitably run into situations in which they do not have experience. This may not be the case in a country with a long history of international trade at the individual level. Also, because of the newness of the market, there are many firms still trying to enter that would love nothing more than for there to be a slip up in your money flow so that they can take advantage.

How To Deal With Late Payments

You may be wondering at this point, “If late payments are such a problem, why has no one ever showed me how to deal with them?” If this sounds like you, then you have found the right part of the article, because we are about to walk through that. One way to deal with late payments is through litigation. If you were doing payment under a Payment Post-Shipment Delivery system, and the payment is not arriving or is late, then you will need to be able to show that you fulfilled your part of the contract and your counterpart did not fulfill theirs. A less complicated method of litigation is opened, however, if you are using one of the documentation methods, which allow you to sue without reference to the contract, and instead simply reference the title documents that you created to be exchanged after payment. Another important measure to take to insulate your business from late payments is to simply expect that they will happen eventually and plan for that. This will allow you to not become cash strapped if a payment is late, especially within a reasonable period of time, considering the troubles that can arise from overseas shipping. Ultimately you will have to decide how much you want to insulate yourself against late payments, but having a couple months of operating cash on hand has never hurt anybody, and can also help you with other cash flow issues unrelated to late payments.

Despite all of these methods to lighten the blow of a late payment, the best way to deal with this problem remains to avoid late payments in the first place. As hard as this is in the import-export industry, there are ways to go about it. One of the most old fashioned, yet reliable ways to deal with late payments is to simply deal with trusted customers. When you deal with a customer with whom you have had a long relationship, you can predict their payment patterns much better.  If a customer has a pattern of making late payments, you may be better off not working with them. When you are first starting out, however, you won’t have long-standing relationships with customers to make decisions around, so this is where doing research and dealing with reputable companies that have a good track record of timely payments is especially important. If you start out only importing to these more reputable clients, then you can build up a cash base so that you can start taking risks on customers with better prices.

Technology To Prevent Late Payments

The technology boom in Africa has brought with it incredible new ways to deal with the problem of late payments in the import-export industry. One of the biggest improvements in technology for ensuring timely payments is Distributed Ledger Technologies which according to an article published in September of 2018 on PYMNTS.com, are being pursued by Kenyan banks, “to facilitate payments.” These Distributed Ledger Technologies are being used all over the world to create trustworthy chains of information that serve as the backbone of many logistics companies and digital currencies. Digital payments in Africa are also on the rise, with some countries, such as Malawi going as far as requiring all local businesses to at least offer digital payment as an option. While this development is not directly associated with international trade, it does show the growing trend towards digital business transactions in Africa. The Nigerian company Paystack hopes to capitalize on this trend toward digital payment by creating a framework for developers to create payment tools. All of these advancements in technology will make payment more and more instantaneous, thereby eliminating more and more of the problems with late payments that you may be experiencing.

How WaystoCap Can Help You Deal With Late Payments In The Import-Export Industry

WaystoCap is a platform that supports importers and exporters in Africa by providing experienced, comprehensive consulting and referrals to entrepreneurs. WaystoCap is the first B2B marketplace in Africa dedicated to international trade and makes available a dedicated, in-house team which boasts many years of experience in international trade.

We are experts in the African market, which means we know and understand local laws, regulations, and trends in various industries. WaystoCap has created a unique opportunity for Africans to build community by trading with other African and international enterprises.

WaystoCap ensures smooth international transactions by providing assistance in a variety of areas from shipping practices to evaluating product quality and securing insurance for your imports and exports. Our platform creates access to the highest quality products, vetted businesses, and to the most affordable goods available for trade on the African continent. By using our platform to research prices, find business partners, and source quality products, you will save time and money – which means you’ll have more time and money to spend on your business!

Sources:

How to export import
National Australia Bank
PYMNTS
WaystoCap
New York Times
Chron
Trade Ready
Face2Face Africa
Quartz Africa

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