Qualifying Customers
Yes, you need to qualify customers!
We often think of the risk posed by an overseas supplier, but too many people don’t think about the risk of an overseas customer.
What are some of those risks?
- The most obvious is that they don’t pay for the product.
- The next most cited concern is IP. The fear that they may copy your product and become a competitor.
- After that companies worry that the client may mis-represent (B2B) or mis-use (B2C) your product and that can lead to liability for an injury or damage.
- Some risks are bigger than the customer – there can be country risks (political upheaval, changing regulations, currency fluctuations, etc).
Lets discuss these one by one.
Not Getting Paid!
How can you reduce the risk of non-payment? The typical method is to have the customer pay in advance. But that is not always possible. You may be in a very competitive environment and they will only buy from companies that provide better payment terms than cash up front.
In that situation how can you be more comfortable? It starts with getting information about the customer. You can ask them to fill out a credit form (their company and banking info), you can ask for references, etc. You could also do research using an outside data base (like Dun & Bradstreet in the U.S.) or working with some of the government resources that can help research international customers (U.S. Commercial Services, etc). EXIM bank financing team can also provide research and support on international customers. And there are private companies that can provide finance risk data as well.
One practical step would be to calculate how much you would be comfortable “losing.” If your cost in the products is 60%, you could ask them to pay that amount up front, and then the balance 40% 30 days later. If you are not paid, then you don’t lose the cost of the product – only your profit.
Another alternative is to work with a third party to secure the payment itself. You could arrange for a bank letter of credit with the supplier, or factor the accounts receivable. We discuss this more in the payments section.
Fear of IP Theft:
Another big concern companies have is that the customer / distributor will copy their product. How can you gauge the risk? How can you prevent this scary situation?
To gauge the risk, look at the research you did on the client. Are they manufacturing a similar product to yours? Are they distributing for your competitors and might have an incentive to share your product information? Consider what kind of a threat this company / individual might present.
Now lets briefly look at protections (covered more in another class).
Americans typically default to contracts – Non-compete agreements, non-disclosure, to require customers to sign terms & conditions of the sale that prohibit them from copying or competing. Those are good ideas, but fundamentally they set you up for a better outcome if there is litigation. What can we do before we get to litigation?
One way to limit IP theft is to consider that risk when you are designing the product. Can you make it difficult for someone to reverse engineer the product? Maybe have a firewall on the embedded software or a custom method for adhering materials together in the construction of the product.
Patents and trademark filed internationally are another method of supporting your claim if someone copies your brand or product.
Depending on your product you could also restrict who can use it. If you have a piece of equipment, you can require them to input a code into the equipment. That equipment could require a connection to your US server to function – and any copy of that equipment would not be able to connect to your server.
These are some of the ways you can protect your company’s brand and product design. In all cases its best to consider this early, not after you have started selling overseas.
Mis-representation and mis-use:
These are another problem you want to consider when qualifying customers.
Lets start with B2C sales. If you are selling to the end customer, could they mis-use the product and get hurt? For this it’s important to understand the regulations in that country for you product. What safety standards are in place? What do you need to incorporate into your design / product labeling? We talk about this in more detail in another class(es) on warranty, product documentation and regulatory compliance.
What about in the B2B scenario? You are selling products to a distributor or trading company who is re-selling the goods, In this circumstance you may not have contact with the end user, so you want to make sure the intermediary is able / willing / effectively providing all the product information and warnings that should be provided.
What if they tell the customer “oh yes, you can use this product to burn inside a residence” when in fact the product must be used outside? To counter this you need a strong distributor agreement, that might include access to the end customer in some product situations.
Some risk are the country level:
Maybe you have found a great customer in a country you have never shipped to before. It’s a good idea to “qualify” the country as well!
What is the status of their banking environment? In some regions that can change every few years. Argentina has real foreign currency and bank problems now, but did not 5 years ago.
What about their inbound customs and import system? Do good often “go missing” when the come into the country? Are there restrictions on certain types of products because of that government’s regulations (prohibited media content or chemical or specific industries that are protected)?
Does the U.S. have export controls on that country or on certain industries or companies in that country? You need to know!
For these issues a good place to start is the U.S. (or your local) government agencies such as U.S. Commercial services, or the ITAC offices at some SBDC locations.