Non-paying international clients – when and how should you start collections procedures?


view of office desk with calculator

view of office desk with calculator

In international trade, problems involving bad debts are more easily avoided than rectified after they occur.

Credit checks and the other methods can limit the risks involved. Nonetheless, just as in a company’s domestic market, it may occasionally encounter problems with importers who default on payments.

When these problems occur in international trade, obtaining payment can be both difficult and expensive. Even when the exporter has insurance to cover commercial credit risks, a default by an importer still requires time, effort and cost.

The exporter must exhaust all reasonable means of obtaining payment before an insurance claim is honoured, and there is often a significant delay before the insurance payment is made.

Where open account terms result in non-payment by the importer, the exporter must commence collections procedures.

Situations that require collections procedures

The process of collecting past-due invoices is more complicated in export sales in foreign countries with substantially different cultures and legal environments. Communicating directly with the importer, or buyer, is the best way of discovering the reason for payment difficulties. However, the approach must always be adjusted to the circumstances.

The simplest and least costly solution to a payment problem is to contact and negotiate with the importer. With patience, understanding and flexibility, an exporter can often resolve conflicts to the satisfaction of both sides. Even though the exporter may be required to compromise on certain points—perhaps even on the price of the committed goods—the company may save a valuable customer and profit in the long run.

If the initial approach to the importer proves unsuccessful, it may be necessary to place the collection of the account in the hands of a collection agency or legal firm.

Such cases may involve circumstances where the importer is unable to service the credit due to insolvency or because of fraudulent behaviour.

It is critical for every company to determine the most prudent course of action when a receivable is deemed uncollectible. If, however, negotiations fail and the sum involved is large enough to warrant the effort, a company should obtain the assistance and advice of its bank, legal counsel and other qualified experts.

It is preferable if both parties can agree to take their dispute to an arbitration agency because arbitration is often faster and less costly than taking legal action. The International Chamber of Commerce handles much of international arbitrations and is usually acceptable to foreign companies because it is not affiliated with any single country. More information on handling disputes in international trade is covered in Unit 5.

International Trade Finance Tip

In some developing and undeveloped countries, an established legal framework for dealing with the settlement of foreign commercial disputes may be rudimentary or non-existent. These factors should be researched and considered when opening sales opportunities in these markets, especially if considering open account terms. The same will apply to importers buying from companies in developing nations, as the settlement of disputes over quality or price may be difficult or not cost-effective.

Using External Parties

Prior to contacting any collection agencies or government bodies for assistance, it is important that the exporter determine the amount which is outstanding. To do so, the exporter must maintain a good record of all its accounts receivable and closely follow the aging report to adequately determine the total amount outstanding with any importer at any point in time.

The first step is for the exporter to determine the total amount outstanding and gather the necessary invoices, proof of shipment or completion of performance on the contract, as well as any supporting email communications with the importer.

Be confident in everything an importer or exporter needs to know about payment, risk mitigation, financing, and the flow of goods and services. Learn more about this topic in the FITTskills International Trade Finance online trade finance banner - international trade instruments, method of settlement in international trade

Insurance Policies

To mitigate risk, many exporters obtain an accounts receivable insurance (ARI) policy that helps secure their receivable in case of non-collection. In such a situation, the exporter should contact the insurance company to inform them of the situation and collaboratively identify the necessary steps moving forward.

Generally, if buyers have declared bankruptcy or have obtained sufficient information of a fraudulent transaction, insurers pay the exporter the outstanding amount and write-off the amount off their balance sheet. However, if the reason for non-collection is different than those previously mentioned, insurers pay the exporter and take ownership of the receivables. The insurer then establishes a connection with the buyer to collect the outstanding amount.

When an insurer contacts the buyers, it is in the buyer’s interest to negotiate the total outstanding amount that they would like to pay back and negotiate a repayment schedule. In any given country, many exporting companies would like to sell to one buyer, especially if the buyer is a large company, a well-known entity or a well-connected distributer or wholesaler. In situations where the insurer obtains a claim on a buyer and is unable to collect funds, the insurer excludes the buyer from all future coverage for all exporters, which indirectly limits future business with the buyer.

Collection Services

There are a multitude of collection agencies around the world that offer collection services. For example, Dun & Bradstreet offers worldwide collection services through its international affiliates. Fees are calculated as a percentage of the amount collected.

The exporter may also contact a local collection agency or legal firm directly, although care must be taken that the collection costs do not exceed the expected proceeds. Since the administrative and legal costs of processing foreign collection procedures are much higher than domestic costs, these collection procedures often recover little or none of the outstanding claim.

Exporters can also seek assistance from Trade Commissioners working at consulates and embassies of any given country. Although the mission of a trade commissioner is to connect potential buyers and sellers of goods in the foreign market to its local market, they can also assist in reaching the buyer to collect funds. In some situations, export credit agency (ECA) foreign representatives can also be of similar assistance, however their reach is limited due to jurisdictional differences.

Although the most obvious step is to hire a collections agency to help collect the funds, it is also possible for the company to write off the receivable as a loss and move on.

When a company hires a collections agency, its employees must dedicate time and energy to provide the required documents to the agents and continued support for future questions. Additionally, the collections agency might charge a flat fee or a commission-based fees, both of which will be paid from the pockets of the exporter. Considering the effort required, it might be worthwhile for the exporter to write off the loss and spend its time and energy on other profitable business.

Have you ever had an issue with non-payment from one of your international clients? Tell us about your experience in the comments below!

This article is an excerpt from the FITTskills International Trade Finance course. Strategically manage your business’s assets by developing a smart financial plan for short, medium and long-term growth

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About the author

Author: FITT Team

The Forum for International Trade Training (FITT) is the standards, certification and training body dedicated to providing international business training, resources and professional certification to individuals and businesses. Created by business for business, FITT’s international business training solutions are the standard of excellence for global trade professionals around the world.

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