FX Risk Management Best Practices: Cross-Border Payments for SMBs

Cross Border Payments for SMBs

In the last article of our series on "The impact of foreign exchange on small to mid-sized companies", we look at how to profitably execute cross-border payments.

More and more small and mid-size (SMBS) companies are conducting business overseas, as company decision makers realize that engaging in international commerce can mean the difference between recording your bottom line in black ink or red.

According to a 2017 study by American Express, an “overwhelming majority (92%) of U.S. SMBs who do business globally see international markets as a significant growth opportunity." Smaller U.S. companies who do export products and services overseas found that they earned 36% of their annual revenues, on average, from transactions occurring outside the U.S.

Additionally, 73% of SMBs who do business internationally expect to generate more sales overseas in 2018, according to Amex. By 2022, 77% of small business owners are “confident" that company cross-border revenues will rise.

On average, SMBs anticipate a 29% increase in revenues over this time period.

SMB Options for Overseas Payments

With goals for international growth on the board, how do companies intend to pay overseas suppliers and partner.

Usually, the options for paying suppliers is fairly limited to the following payment and cash management options:

  1. Advance payment: The overseas supplier only delivers products or services goods once payment is made by requesting companies.
  2. Letters of credit: A domestic company's financial institution “locks in" a payment when given of specified export documents by the supplier. By and large, that lock-in guarantee hikes the cost of those overseas supplier payments.
  3. Documentary collection: When the company sees that overseas suppliers shipped goods, that supplier also ships export documents to the domestic recipient's financial institution. The shipped goods are held in customs until the overseas supplier has received the payment.
  4. Open account trading: The company's foreign supplier delivers goods directly to the company, and both parties agree to payment over a fixed period of time.

Usually, both domestic and foreign parties agree to payment arrangements that represent low risk to both companies, with letters of credit and documentary collections representing the most commonly used payment methods between companies and international suppliers.

Assessing Risk a Big Priority

The largest priority for SMBs handling payments with overseas suppliers and partners is to lower risk exposure.

Much of that risk management scenario should be focused on coming to a mutually beneficial agreement with your supplier/partner; having a candid assessment of your company's cash flow needs; and reviewing the quality of your relationship with your FX payment partner.

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From a more finite financial and accounting standpoint, SMBs and their payment provider should also assess the economic conditions in the country they are targeting for overseas commerce; assess the FX payment system within the country and whether it accepts online payments (and how); understand interest rates and FX currency conversion ; and recognize the urgency of the transaction and whether you are under time constraints.

Smaller U.S. companies dealing with overseas supplier issues need to get a firm grip on the above factors, and to use them to accomplish two chief tasks:

  1. Make sure the terms of payment are “airtight" and completely understood by the company and the supplier or partner.
  2. Have each party sign off on a payment acceptance agreement beforehand that outlines what, when, and how the payment will be made.


What to Avoid When Dealing with Cross-Border Payments

It's not always the big risks that can negate a positive result when making overseas payments. Sometimes basic, but easily correctable, mistakes can be a factor, too.

  • Making a payment too soon: Be mindful of making an overseas payment before you have to. Doing so doesn't allow for any recourse when a transaction goes awry, like receiving a product with inferior quality, or not receiving goods in time to accommodate various business transactional needs.
  • Not working with the right financial institution: Oftentimes, companies partner with a bank in making overseas payments, unaware that there may be other non-banking financial institutions that offer a more customized and cost-effective payment strategy without the fees that larger banks may impose. During your due diligence on choosing a financial institution overseas, make sure to ask the right questions before signing off on any international  agreements.

You'll want to know if your payment provider has the knowledge to advise your company on the benefits and risks of different cross-border payment options. 

Clearing Hurdles

The big takeaway on overseas supplier payment options?

Make sure you know what you're up against, and have a plan of action to overcome the myriad hurdles when handling cross-border payments overseas. The upside is a payment process that reduces risk and keeps cash flowing from overseas on a solid basis. 

After all, your future business revenues may well depend on executing successful and effective overseas payments.


Articles in this series:

  1. Have Cash, Will Travel: For Smaller Companies, FX Markets Offer Risk and Opportunity
  2. FX Risk Management Best Practices: The 5-step Guide for SMBs
  3. 5 Rules for Finding the Perfect Local Partner when doing Business Abroad 
  4. FX Risk Management Best Practices: Cross Border Payments for SMBs