In this post, we look at different ways to get paid when U.S. companies sell firearms, optics, firearm parts and accessories to purchasers outside the United States:
Credit Terms (e.g., 2% 10, Net 30)
Don’t extend credit to customers outside the United States if you can avoid it. It’s not how international business is typically done, so you will rarely be at a competitive disadvantage if you refuse to take credit risk. If you consider how hard it is to collect debts in the United States, it is much more difficult to collect overseas when a buyer can’t or won’t pay you.
There are three main exceptions to this rule.
Giving goods to foreign dealers on consignment – you retain title until the goods are sold to end users and the dealer doesn’t owe you anything until then – is even riskier than selling on open credit and generally is a horrible idea.
There is one exception, Mexico. In Mexico, firearms are sold only by Dirección de Comercialización de Armamento y Municiones (DCAM) in Mexico City. A number of prominent U.S. brands have placed goods at DCAM on consignment and have received payment without problems.
So, in Mexico, placing goods with DCAM on consignment may be what you need to do to be competitive. If you do, start with a small quantity. Also, it is important to reconcile your accounts monthly to be sure that all guns and payments are accounted for as they are sold.
Full payment at the time an order is placed is the norm for online transactions and small commercial transactions.
In larger commercial transactions ($5,000 to $100,000) that require the exporter to go out-of-pocket to manufacture or assemble an order, full payment at the time of order is sometimes seen.
In transactions between $5,000 and $100,000, it is common to see partial payment at the time an order is placed with the balance paid before the order is shipped.
In its simplest form, an exporter will receive 50% of the price when the order is booked and the balance after an export license is received but prior to shipment. There’s nothing magic about a 50-50 split, however, so anything between nothing up front and full payment in advance is within the zone of “normal.”
Recognize that while this type of payment arrangement seems secure for the seller, there are some risks. Once in a while an export license can’t be obtained, which prevents shipment of the order, and, most likely, receipt of the final payment.
Other times, buyers change their minds before shipment or don’t have the funds with which to make the final payment. You should deal with these risks in your terms and conditions of sale (we’ll address commercial terms in a future post).
In a more complex form of “Cash before Payment,” the buyer agrees to make a partial advance payment at the time an order is placed, but only if the seller provides a “bank guaranty” as security for the advance payment. The bank guaranty enables the foreign purchaser to get its money back if the seller never completes and ships the order.
The requirement to provide a bank guaranty as a condition of receiving an advance payment is frequently seen in contracts with foreign governmental purchasers. The advance payment generally is substantially less than 50% of the purchase price.
The question to ask yourself in such a situation is whether you really want the advance payment. Here’s why:
Ask yourself whether there will be a net benefit to accepting the customer’s advance payment if it comes with these strings. The answer could well be no.
Sophisticated buyers with bargaining leverage often seek to hold some funds until the goods have arrived and been inspected and/or tested. Some foreign governmental tenders provide for holdbacks as large as 30%, but 10-20% is more common.
Some things to keep in mind if you agree to a holdback:
Many buyers outside the U.S. provide a documentary letter of credit as a substitute for cash payment for large orders, i.e., over $100,000. For U.S. sellers, documentary letters of credit are a great means of payment, as long as the sellers know what they’re doing. Letters of credit allow a buyer to withhold payment until the order has shipped while providing the seller with assurance of payment that is as good as cash.
A documentary letter of credit is a commitment a bank makes on behalf of your customer to pay you when you present it with documents described in the letter of credit. Usually, the documents include shipping documents confirming that you have shipped the goods the customer ordered. Sometimes, you may also have to provide certificates of inspection and acceptance by the customer.
If you know what you’re doing, a letter of credit is as good as cash. Letters of credit are quite tricky, however, so you need to be very careful. Things to keep in mind if you’re new to letters of credit:
Occasionally, a foreign military purchaser is able to arrange for the U.S. Government to purchase products from a U.S. supplier on its behalf. This type of transaction occurs under the U.S. Government Foreign Military Sales (FMS) program. In FMS sales, your contract is with the U.S. Government so you get paid by Uncle Sam even though you ship to the foreign end user. FMS sales tend to proceed slowly but you do get paid.
“Cash” means:
We don’t recommend using PayPal or any other payment intermediary. In international transactions in our industry, you need to know who is paying you and you want a physical billing address.
“Cash” does not mean a backpack full of actual cash. If a foreign purchaser does offer to pay you in hard cash for a commercial order, you should consider that a mile-high red flag that something is wrong. Even in the case of small consumer sales, it is not a good idea to accept cash. If you are conducting legitimate international business, paper trails are a good thing and hard cash doesn’t leave a paper trail.
Next Tip, No. 4: Deliver the Goods.